UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________
FORM 10-K
_____________________________________
(Mark One)
| ☑ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2022
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-36522
____________________________________________________
Investar Holding Corporation
(Exact name of registrant as specified in its charter)
____________________________________________________
| Louisiana (State or other jurisdiction of incorporation or organization) | 27-1560715 (I.R.S. Employer Identification No.) |
10500 Coursey Blvd., Baton Rouge, Louisiana 70816
(Address of principal executive offices, including zip code)
(225) 227-2222
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common stock, $1.00 par value per share | ISTR | The Nasdaq Global Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
| Large accelerated filer | ☐ | Accelerated filer | ☑ | ||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☑ | ||||||||
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the closing price of the common stock as of June 30, 2022, was approximately $204.4 million.
The number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date, is as follows: Common stock, $1.00 par value per share, 9,912,172 shares outstanding as of March 6, 2023.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement relating to the 2023 Annual Meeting of Shareholders of Investar Holding Corporation are incorporated by reference into Part III of the Form 10-K. Such Definitive Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the registrant’s fiscal year ended December 31, 2022.
| Page |
||||||||
| Item 1. |
||||||||
| Item 1A. |
||||||||
| Item 1B. |
||||||||
| Item 2. |
||||||||
| Item 3. |
||||||||
| Item 4. |
||||||||
| Item 5. |
||||||||
| Item 6. |
||||||||
| Item 7. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|||||||
| Item 7A. |
||||||||
| Item 8. |
||||||||
| Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
|||||||
| Item 9A. |
||||||||
| Item 9B. |
||||||||
| Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | 116 | ||||||
| Item 10. |
||||||||
| Item 11. |
||||||||
| Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
|||||||
| Item 13. |
Certain Relationships and Related Transactions, and Directors Independence |
|||||||
| Item 14. |
||||||||
| Item 15. |
||||||||
| Item 16. |
General
Investar Holding Corporation (the “Company”), a Louisiana corporation incorporated in 2009, is a financial holding company headquartered in Baton Rouge, Louisiana that conducts its operations primarily through its wholly-owned subsidiary, Investar Bank, National Association (the “Bank”), a national bank chartered by the Office of the Comptroller of Currency (“OCC”). The Bank was originally chartered as a Louisiana commercial bank in 2006 and converted to a national bank in July 2019. Through the Bank, the Company offers a wide range of commercial banking products tailored to meet the needs of individuals, professionals, and small to medium-sized businesses. Our primary areas of operation are south Louisiana, including Baton Rouge, New Orleans, Lafayette, Lake Charles, and their surrounding areas; southeast Texas, primarily Houston and its surrounding area; and Alabama, including York and Oxford and their surrounding areas. These markets are served from our executive and operations center located in Baton Rouge and from 29 full service branches located throughout our market areas. We have experienced significant growth since the Bank was chartered, completing seven whole-bank acquisitions and establishing additional branches in our market areas.
As of December 31, 2022, on a consolidated basis, the Company had total assets of $2.8 billion, net loans of $2.1 billion, total deposits of $2.1 billion, and stockholders’ equity of $215.8 million.
In order to improve efficiencies and leverage our digital initiatives, during the last three fiscal years we closed five branches and sold three tracts of land held for future branch locations. In January 2023, we completed the sale of two branches, and we plan to consolidate an additional branch in our Louisiana market in 2023. Over time, management believes that we have significant opportunities for growth and franchise expansion, both organically and through strategic acquisitions. Although the financial services industry is rapidly changing and intensely competitive, and likely to remain so, we believe that the Bank competes effectively as a local community bank and possesses the availability of local access and responsive customer service, coupled with competitively-priced products and services, necessary to successfully compete with other financial institutions for individual and small to medium-sized business customers.
The information set forth in this Annual Report on Form 10-K is as of March 8, 2023, unless otherwise indicated herein.
Operations
General. We offer a full range of commercial and retail lending products throughout our market areas, including business loans to small to medium-sized businesses as well as loans to individuals. Our business lending products include owner-occupied commercial real estate loans, construction loans and commercial and industrial loans, such as term loans, equipment financing and lines of credit, while our loans to individuals include first and second mortgage loans, installment loans, and lines of credit. For business customers, we target small to medium-sized businesses and professional organizations such as law firms, accounting firms and medical practices.
Management considers all of our operations to be aggregated in one reportable operating segment, and accordingly, no separate segment disclosures are presented in this report.
Lending Activities. Income generated by our lending activities represents a substantial portion of our total revenue. For the years ended December 31, 2022, 2021 and 2020, income from our lending activities comprised 76%, 84%, and 83%, respectively, of our total revenue. Over the last three fiscal years, we have increased our focus on commercial real estate loans and commercial and industrial loans.
Lending to Businesses. Our lending to small to medium-sized businesses falls into three general categories:
| • |
Commercial real estate loans. Approximately 50% of our total loans at December 31, 2022 were commercial real estate loans, which include multifamily, farmland and commercial real estate loans, with owner-occupied loans comprising approximately 42% of the commercial real estate loan portfolio. Commercial real estate loan terms generally are 10 years or less, although payments may be structured on a longer amortization basis. Interest rates may be fixed or adjustable, although rates typically will not be fixed for a period exceeding 120 months, and we generally charge an origination fee. Risks associated with commercial real estate loans include, among other things, fluctuations in the value of real estate, new job creation trends, tenant vacancy rates, and the quality of the borrower’s management. We attempt to limit risk by analyzing a borrower’s cash flow and collateral value on an ongoing basis. Also, we typically require personal guarantees from the principal owners of the property, supported by a review of their personal financial statements, as an additional means of mitigating our risk. We also manage risk by avoiding concentrations in any one business or industry. |
| • |
Commercial and industrial loans. Commercial and industrial loans primarily consist of working capital lines of credit and equipment loans. The terms of these loans vary by purpose and by type of underlying collateral. We make equipment loans for a term of five years or less at fixed or variable rates, with the loan fully amortized over the term and secured by the relevant piece of equipment. Loans to support working capital typically have terms not exceeding one year, and such loans are secured by accounts receivable or inventory. Fixed rate loans are priced based on collateral, term and amortization. The interest rate for floating rate loans is typically tied to the prime rate published in The Wall Street Journal. Commercial and industrial loans also include public finance loans made to governmental entities, which can be taxable or tax-exempt, for purposes including debt refinancing, economic development, quality of life projects, short-term cash-flow needs, and infrastructure enhancements, among other things. Public finance loans are generally repaid using pledged revenue sources including income tax, property tax, sales tax, and utility revenue, among other sources. Although public finance loans are less than 5% of our loan portfolio as of December 31, 2022, they have grown in recent periods. Commercial and industrial loans accounted for approximately 21% of our total loans at December 31, 2022. |
Commercial lending generally involves different risks from those associated with commercial real estate lending or construction lending. Although commercial loans may be collateralized by equipment or other business assets (including real estate, if available as collateral), the repayment of these types of loans depends primarily on the creditworthiness and projected cash flow of the borrower (and any guarantors). Thus, the general business conditions of the local economy and the borrower’s ability to sell its products and services, thereby generating sufficient operating revenue to repay us under the agreed upon terms and conditions, are the chief considerations when assessing the risk of a commercial loan. The liquidation of collateral, if any, is considered a secondary source of repayment because equipment and other business assets may, among other things, be obsolete or of limited resale value. We actively monitor certain financial measures of the borrower, including advance rate, cash flow, collateral value and other appropriate credit factors. We also manage risk by avoiding concentrations in any one business or industry.
| • |
Construction and development loans. Construction and development loans, which consist of loans for the construction of commercial projects, single family residential properties and multifamily properties, accounted for approximately 9% of our total loans at December 31, 2022. Our construction and development loans are made on both a “pre-sold” basis and on a “speculative” basis. Construction and development loans are generally made with a term of 6 to 18 months, with interest accruing at either a fixed or floating rate and paid monthly. These loans are secured by the underlying project being built. For construction loans, loan to value ratios range from 70% to 80% of the developed/completed value, while for development loans our loan to value ratios typically will not exceed 70% to 75% of such value. Speculative loans are based on the borrower’s financial strength and cash flow position, and we disburse funds in installments based on the percentage of completion and only after the project has been inspected by an experienced construction lender or third-party inspector. |
Construction lending entails significant additional risks compared to commercial real estate or residential real estate lending due to the dynamics of construction projects, changes in interest rates, the long-term financing market, and state and local government regulations. One such risk is that loan funds are advanced upon the security of the property under construction, which is of uncertain value prior to the completion of construction. Thus, it is more difficult to accurately evaluate the total loan funds required to complete a project and to calculate related loan-to-value ratios. We attempt to minimize the risks associated with construction lending by limiting loan-to-value ratios as described above. In addition, as to speculative development loans, we generally make such loans only to borrowers that have a positive pre-existing relationship with us. We also manage risk by using specific underwriting policies and procedures for these types of loans and by avoiding excessive concentrations in any one business or industry.
Lending to Individuals. We make the following types of loans to our individual customers:
| • |
Residential real estate. 1-4 family residential real estate loans, including second mortgage loans, comprised approximately 19% of our total loans at December 31, 2022. Second mortgage loans in this category include only loans we make to cover the gap between the purchase price of a residence and the amount of the first mortgage; all other second mortgage loans are considered consumer loans. Loan to value ratios do not typically exceed 80%, although some of the mortgage loans that we retain in our portfolio may have higher loan to value ratios. We use an independent appraiser to establish collateral values. We generate residential real estate mortgage loans through Bank referrals and contacts with real estate agents in our markets. We do not originate subprime residential real estate loans. |
| • |
Consumer loans. Consumer loans represented 1% of our total loans at December 31, 2022. We make these loans (which are normally fixed-rate loans) to individuals for a variety of personal, family and household purposes, secured and unsecured installment and term loans, second mortgages, home equity loans and home equity lines of credit. Because many consumer loans are secured by depreciable assets such as cars, boats and trailers, the loans are amortized over the useful life of the asset. The amortization of second mortgages generally does not exceed 15 years and the rates generally are not fixed for more than 60 months. As a general matter, in underwriting these loans, our credit analysts review a borrower’s past credit history, credit scores, past income level, debt history and, when applicable, cash flow, debt to income ratio, and payment to income, and determine the impact of all these factors on the ability of the borrower to make future payments as agreed. A comparison of the value of the collateral, if any, to the proposed loan amount, is also a consideration in the underwriting process. Repayment of consumer loans depends upon key consumer economic measures and upon the borrower’s financial stability and is more likely to be adversely affected by divorce, job loss, illness and personal hardships than repayment of other loans. A shortfall in the value of any collateral also may pose a risk of loss to us for these types of loans. |
Deposits. We offer a broad base of deposit products and services to our individual and business clients, including savings, checking, and money market accounts, as well as a variety of certificates of deposit and individual retirement accounts. We also offer a reciprocal deposit product, Assured Checking, that allows customers to deposit funds in excess of the Federal Deposit Insurance Corporation’s (“FDIC”) $250,000 insurance limit and have the funds insured by the FDIC. We offer debit cards, internet banking, mobile banking with smartphone deposit capability as well as debit card protection settings. For our business clients, we offer a competitive suite of cash management products which include, but are not limited to, remote deposit capture, lockbox payment processing, virtual vaults, electronic statements, positive pay, ACH origination and wire transfer, investment sweep accounts, and enhanced business internet banking.
Other Banking Services. The Bank’s other banking services include cashiers’ checks, direct deposit of payroll and Social Security checks, night depository, bank-by-mail, automated teller machines with deposit automation, debit cards, mobile wallet payment options, business electronic banking for business customers, and Zelle®, a fast and easy way to send money directly between almost any bank account in the United States. In addition, the bank has options for contactless banking including interactive teller machines (“ITMs”) and video banking. ITMs are an upgrade on traditional automated teller machine (“ATM”) technology that allow customers to virtually interact directly with Bank staff. Video banking lets customers communicate with Bank staff from a mobile device or computer without visiting a branch.
We have also associated with nationwide networks of ATMs, enabling the Bank’s customers to use ATMs throughout our markets and other regions. We offer merchant card services through a third-party vendor and a business credit card product. The Bank does not offer trust services or insurance products.
Acquisition Activity
General.From time to time we evaluate potential acquisition opportunities including whole-bank acquisitions and strategic branch acquisitions. We believe there are many banking institutions that continue to face credit challenges, capital constraints and liquidity issues and that lack the scale and management expertise to manage the increasing regulatory burden. Our management team has a long history of identifying targets, assessing and pricing risk and executing acquisitions in a creative, yet disciplined, manner. We seek acquisitions that provide meaningful financial benefits, long-term organic growth opportunities and expense reductions, without compromising our risk profile. Additionally, we seek banking markets with favorable competitive dynamics and potential consolidation opportunities.
Recent Acquisitions. All of our acquisition activity is evaluated and overseen by a standing Mergers and Acquisitions Committee of our board of directors. A discussion of acquisitions completed since January 1, 2020, is set forth under the heading “Certain Events That Affect Year-over-Year Comparability – Acquisitions” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Sale of two branches to First Community Bank. On January 27, 2023, the Bank completed its previously announced sale of certain assets, deposits and other liabilities associated with its Alice and Victoria, Texas locations to First Community Bank, a Texas state bank located in Corpus Christi, Texas. The Bank sold approximately $13.9 million in loans and $14.5 million in deposits.
Branch closures and land sales. During the last three fiscal years, we closed five branches and sold three tracts of land held for future branch locations. Four of the branches had been acquired, and the closures involved anticipated synergies that resulted in significant cost savings. We plan to consolidate an additional branch located in our Louisiana market in 2023. We continue to evaluate opportunities to reduce our physical branch footprint and further improve efficiency through digital initiatives.
De Novo Branches
During our last three fiscal years, we have opened two full-service branch locations in Louisiana, consisting of one location in the Lake Charles market, and one location in the New Orleans market, in addition to the branches we acquired through our acquisition activity. We do not expect to open de novo branches in 2023.
Competition
We face competition in all major product and geographic areas in which we conduct our operations. Through the Bank, we compete for available loans and deposits with state, regional and national banks, as well as savings and loan associations, credit unions, finance companies, mortgage companies, insurance companies, brokerage firms and investment companies. All of these institutions compete in the delivery of services and products through availability, quality and pricing, both with respect to interest rates on loans and deposits and fees charged for banking services. Many of our competitors are larger and have substantially greater resources than we do, including higher total assets and capitalization, greater access to capital markets, and a broader offering of financial services. As larger institutions, many of our competitors can offer more attractive pricing than we can offer and have more extensive branch networks from which they can offer their financial services products.
While we continually strive to offer competitive pricing for our banking products, we believe that our community bank approach to customers, focusing on quality customer service, and maintaining strong customer relationships affords us the best opportunity to successfully compete with other institutions. In addition, as a smaller institution, we think we can be flexible in developing and implementing new products and services. Further, in recent years there has been consolidation activity involving banks with a presence in our markets. In our view, mergers and other business combinations within our markets provide us with growth opportunities. Many acquisitions, especially when local institutions are acquired by institutions based outside our markets, result not only in customer disruption, but also in a loss of market knowledge and relationships that we believe provide us the opportunity to acquire customers seeking a personalized approach to banking. Furthermore, acquisition activity typically creates opportunities to hire talented personnel from the combining institutions.
The following table sets forth certain information about our total deposits, and our share of total deposits, in specified locations, and is shown as of June 30, 2022, which is the latest date for which such information is available.
| Location |
Investar Total Deposits |
Investar Share of Deposits |
||||||
| (in millions) |
||||||||
| Baton Rouge, Louisiana |
$ | 756 | 2.9 | % | ||||
| New Orleans, Louisiana |
263 | 0.5 | ||||||
| Lafayette, Louisiana |
259 | 2.9 | ||||||
| Evangeline Parish, Louisiana(1) |
160 | 21.3 | ||||||
| East and West Feliciana Parishes, Louisiana(1) |
150 | 24.4 | ||||||
| Calcasieu Parish, Louisiana(1) |
11 | 0.2 | ||||||
| Houston, Texas |
144 | 0.0 | ||||||
| Sumter County, Alabama(1) |
107 | 38.7 | ||||||
| Calhoun County, Alabama(1) |
190 | 8.0 | ||||||
| (1) |
Evangeline Parish, East and West Feliciana Parishes, Calcasieu Parish, Sumter County, and Calhoun County are not included in Metropolitan Statistical Areas but are included in this table to reflect the deposit balances of our branches in these parishes and counties. |
Supervision and Regulation
General. Banking is highly regulated under federal and state law. The following is a brief summary of certain aspects of that regulation which are material to us and does not purport to be a complete description of all regulations that affect us or all aspects of those regulations. To the extent particular statutory and regulatory provisions are described, the description is qualified in its entirety by reference to the particular statute or regulation.
We are a financial holding company registered under the Bank Holding Company Act of 1956, as amended, and are subject to supervision, regulation and examination by the Federal Reserve. The Bank is a national bank chartered under the laws of the United States by the OCC and is subject to supervision, regulation and examination by the OCC. This system of supervision and regulation establishes a comprehensive framework for our operations and, consequently, can have a material impact on our growth and earnings performance.
The primary goals of the bank regulatory scheme are to maintain a safe and sound banking system and to facilitate the conduct of sound monetary policy. This system is intended primarily for the protection of the FDIC’s deposit insurance funds, bank depositors, and the public, rather than our shareholders and creditors. The banking agencies have broad enforcement power over bank holding companies and banks, including the authority, among other things, to enjoin “unsafe or unsound” practices, require affirmative action to correct any violation or practice, issue administrative orders that can be judicially enforced, direct increases in capital, direct the sale of subsidiaries or other assets, limit dividends and distributions, restrict growth, assess civil monetary penalties, remove officers and directors, and, with respect to banks, terminate deposit insurance or place the bank into conservatorship or receivership. In general, these enforcement actions may be initiated for violations of laws and regulations or unsafe or unsound practices.
The Dodd-Frank Act. The Dodd-Frank Act, enacted on July 21, 2010, aims to restore responsibility and accountability to the financial system by significantly altering the regulation of financial institutions and the financial services industry. Full implementation of the Dodd-Frank Act has required many new rules to be issued by federal regulatory agencies over the last several years, and it will continue to profoundly affect how financial institutions will be regulated in the future.
The Dodd-Frank Act, among other things:
| • |
established the Consumer Financial Protection Bureau, an independent bureau within the Federal Reserve System with centralized responsibility for promulgating and enforcing federal consumer protection laws applicable to all entities offering consumer financial products or services; |
| • |
established the Financial Stability Oversight Council, tasked with the authority to identify and monitor institutions and systems that pose a systemic risk to the financial system; |
| • |
changed the assessment base for federal deposit insurance from the amount of insured deposits held by the depository institution to the institution’s average total consolidated assets less tangible equity; |
| • |
increased the minimum reserve ratio for the Deposit Insurance Fund from 1.15% to 1.35%; |
| • |
permanently increased the deposit insurance coverage amount from $100,000 to $250,000; |
| • |
required the federal banking agencies to make their capital requirements for insured depository institutions countercyclical, so that capital requirements increase in times of economic expansion and decrease in times of economic contraction; |
| • |
directed the Federal Reserve to establish interchange fees for debit cards under a restrictive “reasonable and proportional cost” per transaction standard; |
| • |
limited the ability of banking organizations to sponsor or invest in private equity and hedge funds and to engage in proprietary trading; |
| • |
increased regulation of consumer protections regarding mortgage originations, including originator compensation, minimum repayment standards, prepayment consideration, and mortgage servicing; |
| • |
restricted the preemption of select state laws by federal banking law applicable to national banks and disallowed subsidiaries and affiliates of national banks from availing themselves of such preemption; |
| • |
authorized national and state banks to establish de novo branches in any state that would permit a bank chartered in that state to open a branch at that location; and |
| • |
repealed the federal prohibition on the payment of interest on commercial demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts. |
Some of these provisions have had and may continue to have the consequence of increasing our expenses, decreasing our revenues, and changing the activities in which we choose to engage. Many aspects of the Dodd-Frank Act are subject to ongoing implementation; further, in the past certain provisions implemented by federal agencies have been legislatively revised or rescinded. While we cannot predict what effect any presently contemplated or future changes in the laws or regulations or their interpretations would have on us, these changes could be materially adverse to our financial condition and results of operations.
The Volcker Rule. On December 10, 2013, the Federal Reserve and the other federal banking regulators as well as the SEC each adopted a final rule implementing Section 619 of the Dodd-Frank Act, commonly referred to as the “Volcker Rule.” Generally speaking, the final rule prohibited a bank and its affiliates from engaging in proprietary trading and from sponsoring certain “covered funds” or from acquiring or retaining any ownership interest in such covered funds. Most private equity, venture capital and hedge funds are considered “covered funds” as are bank trust preferred collateralized debt obligations. The final rule required banking entities to divest disallowed securities by July 21, 2015, subject to extension upon application. The Economic Growth, Regulatory Relief, and Consumer Protection Act which was enacted in 2018 amended Section 619 of the Dodd-Frank Act to exempt from the Volcker Rule any insured depository institution that has $10.0 billion or less in total consolidated assets and whose total trading assets and trading liabilities are 5.0% or less of total consolidated assets, therefore, the Bank is currently exempt from the Volcker Rule.
Regulatory Capital Requirements
Capital Adequacy. The Federal Reserve Board monitors the capital adequacy of the Company, on a consolidated basis, and the OCC monitors the capital adequacy of the Bank. The regulatory agencies use a combination of risk-based guidelines and a leverage ratio to evaluate capital adequacy and consider these capital levels when taking action on various types of applications and when conducting supervisory activities related to safety and soundness. The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profiles among financial institutions and their holding companies, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. A financial institution’s assets and off-balance sheet items, such as letters of credit and unfunded loan commitments, are assigned to broad risk categories, each with appropriate risk weights. Regulatory capital, in turn, is classified in one of two tiers. “Tier 1” capital includes two components: (1) common equity Tier 1 capital and (2) additional Tier 1 capital. Common equity Tier 1 capital consists solely of common stock (plus related surplus), retained earnings and limited amounts of minority interests that are in the form of common stock. Additional Tier 1 capital includes other perpetual instruments historically included in Tier 1 capital, such as non-cumulative perpetual preferred stock. “Tier 2” capital includes, among other things, qualifying subordinated debt and allowances for loan and lease losses, subject to limitations. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. Pursuant to the regulatory capital rules, the Company has made an election not to include unrealized gains and losses in the investment securities portfolio for purposes of calculating “Tier 1” capital and “Tier 2” capital.
Under the current regulatory framework, we are required to maintain the following minimum regulatory capital ratios:
| • |
A ratio of common equity Tier 1 capital to total risk-weighted assets of at least 4.5%; |
| • |
A ratio of Tier 1 capital to total risk-weighted assets of at least 6.0%; |
| • |
A ratio of Tier 1 capital plus Tier 2 capital to total risk-weighted assets of at least 8.0%; and |
| • |
A leverage ratio (Tier 1 capital to adjusted total assets) of at least 4.0%. |
In addition to these minimum regulatory capital ratios, the regulations establish a capital conservation buffer with respect to the first three capital ratios listed above. Specifically, banking organizations must hold common equity Tier 1 capital in excess of their minimum risk-based capital ratios by at least 2.5% of risk-weighted assets in order to avoid limits on capital distributions (including dividend payments, discretionary payments on Tier 1 instruments, and stock buybacks) and certain discretionary bonus payments to executive officers. Thus, when including the 2.5% capital conservation buffer, a bank holding company and bank’s minimum ratio of common equity Tier 1 capital to total risk-weighted assets becomes 7%, its minimum ratio of Tier 1 capital to total risk-weighted assets becomes 8.5%, and its minimum ratio of total capital to total risk-weighted assets becomes 10.5%.
We were in compliance with all applicable minimum regulatory capital requirements, including the capital conservation buffer, as of December 31, 2022.
The required capital ratios set forth above are minimums, and the Federal Reserve and the OCC may determine that a banking organization, based on its size, complexity or risk profile, must maintain a higher level of capital in order to operate in a safe and sound manner. Risks such as concentration of credit risks and the risk arising from non-traditional activities, as well as the institution’s exposure to a decline in the economic value of its capital due to changes in interest rates, and an institution’s ability to manage those risks are important factors that are to be taken into account by the federal banking agencies in assessing an institution’s overall capital adequacy.
The federal banking agencies finalized a rule in 2019 that allows bank holding companies and banks with less than $10.0 billion in total consolidated assets, limited amounts of certain assets and off balance sheet exposures, and a leverage ratio of greater than 9% to elect to use the Community Bank Leverage Ratio (“CBLR”) framework. A community banking organization electing to use the CBLR framework would have a simplified capital regime and would be considered well capitalized as long as it had a leverage ratio of greater than 9%. We have not elected to use the CBLR framework, and it is uncertain if we will elect to use the CBLR framework in the future.
Furthermore, the U.S. federal banking agencies have finalized rules that permit bank holding companies and banks to phase-in, for regulatory capital purposes, the day-one impact of the new current expected credit loss accounting rule in retained earnings over a period of three years commencing with time of adoption of the new standard. For further discussion of the new current expected credit loss accounting rule, see Note 1. Summary of Significant Accounting Policies – Recent Accounting Pronouncements, in the Notes to Consolidated Financial Statements contained in Item 8. Financial Statements and Supplementary Data and also see “Our allowance for loan losses may prove to be insufficient to absorb losses inherent in our loan portfolio, and we may be required to further increase our provision for loan losses” in Item 1A. Risk Factors.
Prompt Corrective Action Regulations. Under the prompt corrective action regulations, the OCC is required and authorized to take supervisory actions against undercapitalized banks. For this purpose, a bank is placed in one of the following five categories based on its capital: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Under the prompt corrective action regulations, as currently in effect, to be well capitalized, a bank must have a leverage capital ratio of at least 5%, a common equity Tier 1 capital ratio of at least 6.5%, a Tier 1 risk-based capital ratio of at least 8%, and a total risk-based capital ratio of at least 10%, and must not be subject to any order or written agreement or directive by a federal banking agency to meet and maintain a specific capital level for any capital measure.
Federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other discretionary actions with respect to banks in the three undercapitalized categories that, if undertaken, could have a material adverse effect on the bank's operations or financial condition. The severity of the action depends upon the capital category in which the bank is placed. Generally, subject to a narrow exception, banking regulators must appoint a receiver or conservator for a bank that is critically undercapitalized. The federal banking agencies have specified by regulation the relevant capital level for each category. A bank that is categorized as undercapitalized, significantly undercapitalized, or critically undercapitalized is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. An undercapitalized bank also is generally prohibited from increasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, except under an accepted capital restoration plan or with OCC approval. The regulations also establish procedures for downgrading a bank to a lower capital category based on supervisory factors other than capital. Additionally, only a well-capitalized depository bank may accept brokered deposits without prior regulatory approval.
Furthermore, a bank holding company must guarantee that a subsidiary depository institution meets its capital restoration plan, subject to various limitations. The controlling holding company’s obligation to fund a capital restoration plan is limited to the lesser of 5% of an undercapitalized subsidiary’s assets at the time it became undercapitalized or the amount required to meet regulatory capital requirements.
The capital classification of a bank affects the frequency of regulatory examinations, the bank’s ability to engage in certain activities, and the deposit insurance premiums paid by the bank. As of December 31, 2022, the Bank met the requirements to be categorized as well capitalized under the prompt corrective action framework as currently in effect.
Acquisitions by Bank Holding Companies
Federal laws, including the Bank Holding Company Act and the Change in Bank Control Act, impose additional prior notice or approval requirements and ongoing regulatory requirements on any investor that seeks to acquire direct or indirect “control” of an FDIC-insured depository institution or bank holding company. We must obtain the prior approval of the Federal Reserve before (1) acquiring more than 5% of the voting stock of any bank or other bank holding company, (2) acquiring all or substantially all of the assets of any bank or bank holding company, or (3) merging or consolidating with any other bank holding company. The Federal Reserve may determine not to approve any of these transactions if it would result in or tend to create a monopoly or substantially lessen competition or otherwise function as a restraint of trade, unless the anti-competitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks concerned, the convenience and needs of the community to be served, and the record of a bank holding company and its subsidiary bank(s) in combating money laundering activities. In addition, a failure to implement and maintain adequate compliance programs could cause the Federal Reserve or other banking regulators not to approve an acquisition when regulatory approval is required or to prohibit an acquisition even if approval is not required.
If the Bank seeks to acquire another depository institution or branches of another depository institution, it is required to obtain the prior approval of the OCC. In reviewing the application, the OCC will consider, among other things, the Bank’s capital level, its financial and managerial resources and future prospects, the impact of the transaction on the Bank’s safety and soundness, the impact of the transaction on competition in the relevant geographic market, its record in combating money laundering activities, the impact on the convenience and needs of the communities served, and the Bank’s record of Community Reinvestment Act performance.
Scope of Permissible Bank Holding Company Activities
In general, the Bank Holding Company Act limits the activities permissible for bank holding companies to the business of banking, managing or controlling banks, and such other activities as the Federal Reserve has determined to be so closely related to banking as to be properly incident thereto.
A bank holding company may elect to be treated as a financial holding company and receive expanded powers if it and its depository institution subsidiaries are “well capitalized” and “well managed,” and its subsidiary banks controlled by it have at least a “satisfactory” Community Reinvestment Act rating. We have elected for the Company to be treated as a financial holding company. As a financial holding company, we may engage in a range of activities that are (1) financial in nature or incidental to such financial activity or (2) complementary to a financial activity and which do not pose a substantial risk to the safety and soundness of a depository institution or to the financial system generally. These activities include securities dealing, underwriting and market making, insurance underwriting and agency activities, merchant banking and insurance company portfolio investments. Expanded financial activities of financial holding companies generally will be regulated according to the type of such financial activity: banking activities by banking regulators; securities activities by securities regulators; and insurance activities by insurance regulators.
The Bank Holding Company Act does not place territorial limitations on permissible non-banking activities of bank holding companies. The Federal Reserve has the power to order any bank holding company or its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when the Federal Reserve has reasonable grounds to believe that continuation of such activity or such ownership or control constitutes a serious risk to the financial soundness, safety or stability of any bank subsidiary of the bank holding company.
Source of Strength Doctrine for Bank Holding Companies
Under longstanding Federal Reserve policy which has been codified by the Dodd-Frank Act, we are expected to act as a source of financial strength to, and to commit resources to support, the Bank. This support may be required at times when we may not be inclined to provide it. In addition, any capital loans that we make to the Bank are subordinate in right of payment to deposits and to certain other indebtedness of the Bank. In the event of our bankruptcy, any commitment by us to a federal bank regulatory agency to maintain the capital of the Bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.
Dividends
As a bank holding company, we are subject to certain restrictions on dividends under applicable banking laws and regulations. The Federal Reserve has issued a policy statement that provides that a bank holding company should not pay dividends unless: (1) its net income over the last four quarters (net of dividends paid) has been sufficient to fully fund the dividends; (2) the prospective rate of earnings retention appears to be consistent with the capital needs, asset quality and overall financial condition of the bank holding company and its subsidiaries; and (3) the bank holding company will continue to meet minimum required capital adequacy ratios. Accordingly, a bank holding company should not pay cash dividends that exceed its net income or that can only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing. The Dodd-Frank Act imposes, and Basel III effected, additional restrictions on the ability of banking institutions to pay dividends (including failure to maintain capital above the Basel III capital conservation buffer). In addition, in the current financial and economic environment, the Federal Reserve Board has indicated that bank holding companies should carefully review their dividend policy and has discouraged payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong. The Federal Reserve may further restrict the payment of dividends by engaging in supervisory action to restrict dividends or by requiring us to maintain a higher level of capital than would otherwise be required under any applicable minimum capital requirements.
Our ability to pay dividends depends in part upon the receipt of dividends from the Bank. The Bank is also subject to certain restrictions on dividends under federal laws, regulations and policies. In general, under OCC regulations, the Bank may pay dividends to us without the approval of the OCC only so long as the amount of the dividend does not exceed the Bank’s net income earned during the current year (net of dividends paid) combined with its retained net income (net of dividends paid) of the immediately preceding two years. The Bank must obtain the approval of the OCC for any amount in excess of this threshold. Further, a national bank may not pay a dividend in excess of its undivided profits. In addition, under federal law, the Bank may not pay any dividend to us if it is undercapitalized or the payment of the dividend would cause it to become undercapitalized. The OCC may further restrict the payment of dividends by requiring the Bank to maintain a higher level of capital than would otherwise be required to be adequately capitalized for regulatory purposes. Moreover, if, in the opinion of the OCC, the Bank is engaged in an unsound practice (which could include the payment of dividends even within the legal requirements noted above), the OCC may require the Bank to cease such practice. The OCC has indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe banking practice.
Restrictions on Transactions with Affiliates and Loans to Insiders
Federal law strictly limits the ability of banks to engage in transactions with their affiliates, including their parent bank holding companies. Sections 23A and 23B of the Federal Reserve Act, and Federal Reserve Regulation W, impose quantitative limits, qualitative standards, and collateral requirements on certain transactions by a bank with, or for the benefit of, its affiliates, and generally require those transactions to be on terms at least as favorable to the bank as transactions with non-affiliates and to be consistent with safe and sound practices. The Dodd-Frank Act significantly expanded the coverage and scope of the limitations on affiliate transactions within a banking organization, including an expansion of the types of transactions that are covered transactions to include credit exposures related to derivatives, repurchase agreements and securities lending arrangements and an increase in the amount of time for which collateral requirements regarding covered transactions must be satisfied.
Federal law also limits a bank’s authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons. Among other things, extensions of credit to insiders are required to be made on terms that are substantially the same as and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons. Also, the terms of such extensions of credit may not involve more than the normal risk of repayment or present other unfavorable features and may not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the bank’s capital.
Incentive Compensation Guidance
The federal banking agencies have issued comprehensive guidance on incentive compensation policies. This guidance is designed to ensure that a financial institution’s incentive compensation structure does not encourage imprudent risk taking, which may undermine the safety and soundness of the institution. The guidance, which applies to all employees that have the ability to materially affect an institution’s risk profile, either individually or as part of a group, is based upon three primary principles: (1) balanced risk taking incentives; (2) compatibility with effective controls and risk management; and (3) strong corporate governance.
An institution’s supervisory ratings will incorporate any identified deficiencies in an institution’s compensation practices, and it may be subject to an enforcement action if the incentive compensation arrangements pose a risk to the safety and soundness of the institution. Further, regulations may limit discretionary bonus payments to bank executives if the institution’s regulatory capital ratios fail to exceed certain thresholds.
Deposit Insurance Assessments
FDIC insured banks are required to pay deposit insurance assessments to the FDIC. The amount of the assessment is based on the size of the bank’s assessment base, which is equal to its average consolidated total assets less its average tangible equity, and its risk classification under an FDIC risk-based assessment system. Institutions assigned to higher risk classifications (that is, institutions that pose a higher risk of loss to the Deposit Insurance Fund) pay assessments at higher rates than institutions that pose a lower risk. An institution’s risk classification is assigned based on certain financial data and the level of supervisory concern that the institution poses to the regulators. In addition, the FDIC can impose special assessments in certain instances. As noted above, the Dodd-Frank Act changed the way that deposit insurance premiums are calculated. Action by the FDIC to replenish the Deposit Insurance Fund when needed could result in higher assessment rates, which could reduce our profitability or otherwise negatively impact our operations. The FDIC issued a final rule in October 2022 increasing deposit insurance assessments beginning in the first quarterly assessment period of 2023.
Branching and Interstate Banking
Under federal law, the Bank is permitted to establish additional branch offices within Louisiana, subject to the approval of the OCC. As a result of the Dodd-Frank Act, the Bank may also establish additional branch offices outside of Louisiana, subject to prior regulatory approval, so long as the laws of the state where the branch is to be located would permit a state bank chartered in that state to establish a branch. The Bank may also establish offices in other states by merging with banks or by purchasing branches of other banks in other states, subject to certain restrictions.
Community Reinvestment Act
The Bank is required under the Community Reinvestment Act, or CRA, and related OCC regulations to help meet the credit needs of its communities, including low and moderate-income borrowers. In connection with its examination of the Bank, the OCC assesses our record of compliance with the CRA. The Bank’s failure to comply with the provisions of the CRA could, at a minimum, result in denial of certain corporate applications, such as branches or mergers, or in restrictions on its or the Company’s activities. The Bank received a “Satisfactory” CRA rating on its most recent CRA Performance Evaluation. The CRA requires all FDIC-insured institutions to publicly disclose their rating. The federal banking agencies have proposed changes intended to modernize the CRA regulations, but at present such changes have not been finalized.
Concentrated Commercial Real Estate Lending Regulations
The federal bank regulatory agencies have promulgated guidance governing financial institutions with concentrations in commercial real estate lending. The guidance provides that a bank has a concentration in commercial real estate lending if (i) total reported loans for construction, land development, and other land represent 100% or more of total capital or (ii) total reported loans secured by multifamily and nonfarm nonresidential properties and loans for construction, land development, and other land represent 300% or more of total capital and the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months. Owner-occupied loans are excluded from this second category. If a concentration is present, management must employ heightened risk management practices that address, among other things, board and management oversight and strategic planning, portfolio management, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, and maintenance of increased capital levels as needed to support the level of commercial real estate lending. At December 31, 2022, the Companydid not have a concentration in commercial real estate as defined by the regulatory guidance.
Financial Privacy and Cybersecurity Requirements
Federal law and regulations limit a financial institution’s ability to share consumer financial information with unaffiliated third parties. Specifically, these provisions require all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of personal financial information with unaffiliated third parties. The sharing of information for marketing purposes is also subject to limitations. The Bank currently has a privacy protection policy in place.
Federal law and regulations also establish certain information security guidelines that require each financial institution, under the supervision and ongoing oversight of its board of directors or an appropriate committee thereof, to develop, implement, and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, to protect against anticipated threats or hazards to the security or integrity of such information, and to protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. Under federal guidance, banks have to provide notice to affected customers of a data breach under certain circumstances, and the agencies recently adopted a rule requiring notice to the primary federal regulator within certain timeframes for certain data security incidents.
Consumer Laws and Regulations
The Bank is subject to numerous laws and regulations intended to protect consumers in transactions with the Bank, including, among others, laws regarding unfair, deceptive and abusive acts and practices, usury laws, and other federal consumer protection statutes. These federal laws include the Equal Credit Opportunity Act (the “ECOA”), the Electronic Fund Transfer Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Real Estate Settlement Procedures Act of 1974, the S.A.F.E. Mortgage Licensing Act of 2008, the Truth in Lending Act and the Truth in Savings Act, among others. Many states and local jurisdictions have consumer protection laws analogous, and in addition, to those enacted under federal law. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans and conducting other types of transactions. Failure to comply with these laws and regulations could give rise to regulatory sanctions, customer rescission rights, action by state and local attorneys general and civil or criminal liability.
In addition, the Dodd-Frank Act created the Consumer Financial Protection Bureau that has broad authority to regulate and supervise retail financial services activities of banks and various non-bank providers. The Bureau has authority to promulgate regulations, issue orders, guidance and policy statements, conduct examinations and bring enforcement actions with regard to consumer financial products and services. In general, however, banks with assets of $10 billion or less, such as the Bank, will continue to be examined for consumer compliance by their primary federal bank regulator. In October 2022, the U.S. Court of Appeals for the 5th Circuit issued a decision ruling that the Consumer Financial Protection Bureau’s funding mechanism violates the separation-of-powers principles embodied in the U.S. Constitution’s Appropriations Clause. This ruling has essentially called into question the validity of the Bureau’s authority to issue regulations and pursue enforcement actions. The Bureau recently filed a certiorari petition with the U.S. Supreme Court seeking an expedited hearing and decision to clarify the agency’s authority. We believe that the banking industry generally will continue complying with the Bureau’s regulations until clarity is provided.
There has been an enhanced focus by federal bank regulatory agencies with respect to industry practices relating to overdraft fees and non-sufficient funds fees. For example, the Consumer Financial Protection Bureau issued a Request for Information in January 2022 seeking public input with respect to financial institution practices relating to, among other areas, credit card fees, overdraft fees and non-sufficient funds fees and stated its intent to reduce these types of fees through crafting rules, issuing industry guidance and focusing supervision and enforcement resources to achieve this goal. In October 2022, the Consumer Financial Protection Bureau issued guidance with respect to certain practices relating to overdraft fees and bounced check fees. The FDIC issued guidance in August 2022 with respect to bank practices involving charging multiple non-sufficient funds fees on the representment of items on a deposit account.
Mortgage Lending Rules
The Dodd-Frank Act authorized the Consumer Financial Protection Bureau to establish certain minimum standards for the origination of residential mortgages, including a determination of the borrower’s ability to repay. Under the Dodd-Frank Act, financial institutions may not make a residential mortgage loan unless they make a “reasonable and good faith determination” that the consumer has a “reasonable ability” to repay the loan. The Dodd-Frank Act allows borrowers to raise certain defenses to foreclosure but provides a full or partial safe harbor from such defenses for loans that are “qualified mortgages.” The Bureau’s rules, among other things, specify the types of income and assets that may be considered in the ability-to-repay determination, the permissible sources for verification, and the required methods of calculating the loan’s monthly payments. The rules extend the requirement that creditors verify and document a borrower’s income and assets to include all information that creditors rely on in determining repayment ability. The rules also provide further examples of third-party documents that may be relied on for such verification, such as government records and check cashing or funds transfer service receipts. The rules also define “qualified mortgages,” imposing both underwriting standards and limits on the terms of their loans. Points and fees are subject to a relatively stringent cap, and the terms include a wide array of payments that may be made in the course of closing a loan. Certain loans, including interest-only loans and negative amortization loans, cannot be qualified mortgages.
Anti-Money Laundering and OFAC
Under federal law, financial institutions must maintain anti-money laundering programs that include: established internal policies, procedures and controls; a designated compliance officer; an ongoing employee training program; and testing of the program by an independent audit function. Financial institutions are also prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence and customer identification in their dealings with foreign financial institutions and foreign customers. Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious transactions, and law enforcement authorities have been granted increased access to financial information maintained by financial institutions.
The Office of Foreign Assets Control, or OFAC, is responsible for helping to ensure that U.S. entities do not engage in transactions with certain prohibited parties, as defined by various Executive Orders and Acts of Congress. OFAC publishes lists of persons and organizations suspected of aiding, harboring or engaging in terrorist acts, known as Specially Designated Nationals and Blocked Persons. Generally, if the Bank identifies a transaction, account or wire transfer relating to a person or entity on an OFAC list, it must freeze the account or block the transaction, file a suspicious activity report and notify the appropriate authorities.
Bank regulators routinely examine institutions for compliance with these obligations and they must consider an institution’s compliance in connection with the regulatory review of applications, including applications for banking mergers and acquisitions. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing and comply with OFAC sanctions, or to comply with relevant laws and regulations, could have serious legal, reputational and financial consequences for the institution.
Safety and Soundness Standards
Federal bank regulatory agencies have adopted guidelines that establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. Additionally, the agencies have adopted regulations that provide the authority to order an institution that has been given notice by an agency that it is not satisfying any of these safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized institution is subject under the “prompt corrective action” provisions of the Federal Deposit Insurance Act. If an institution fails to comply with such an order, the agency may seek to enforce such order in judicial proceedings and to impose civil money penalties.
Bank holding companies are also not permitted to engage in unsound banking practices. For example, the Federal Reserve’s Regulation Y requires a holding company to give the Federal Reserve prior notice of any redemption or repurchase of its own equity securities, if the consideration to be paid, together with the consideration paid for any repurchases in the preceding year, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve may oppose the transaction if it believes that the transaction would constitute an unsafe or unsound practice or would violate any law or regulation. As another example, a holding company could not impair its subsidiary bank’s soundness by causing it to make funds available to non-banking subsidiaries or their customers if the Federal Reserve believed it not prudent to do so. The Federal Reserve has broad authority to prohibit activities of bank holding companies and their nonbanking subsidiaries that represent unsafe and unsound banking practices or that constitute violations of laws or regulations.
Effect of Governmental Monetary Policies
The commercial banking business is affected not only by general economic conditions but also by U.S. fiscal policy and the monetary policies of the Federal Reserve. Some of the instruments of monetary policy available to the Federal Reserve include changes in the discount rate on member bank borrowings, the fluctuating availability of borrowings at the “discount window,” open market operations, the imposition of and changes in reserve requirements against member banks’ deposits and assets of foreign branches, and the imposition of and changes in reserve requirements against certain borrowings by banks and their affiliates. These policies influence to a significant extent the overall growth of bank loans, investments, and deposits and the interest rates charged on loans or paid on deposits. For example, during 2022 and in 2023 the Federal Open Market Committee of the Federal Reserve increased the target rate range for trading in the federal funds market (known as the federal funds target rate or the federal funds rate) multiple times, increasing market interest rates. The federal funds rate is the rate at which commercial banks borrow and lend their excess reserves to each other overnight. We cannot predict the nature of future fiscal and monetary policies and the effect of these policies on our future business and earnings.
Future Legislation and Regulatory Reform
New laws, regulations and policies are regularly proposed that contain wide-ranging proposals for altering the structures, regulations and competitive relationships of financial institutions operating in the United States. In addition, existing laws, regulations and policies are continually subject to modification or changes in interpretation. We cannot predict whether or in what form any law, regulation or policy will be adopted or modified or the extent to which our operations and activities, financial condition, results of operations, growth plans or future prospects may be affected by its adoption or modification.
The cumulative effect of these laws and regulations adds significantly to the cost of our operations and thus has a negative impact on profitability. There has also been a tremendous expansion in recent years of financial service providers that are not subject to the same level of regulation, examination and oversight as we are. Those providers, because they are not so highly regulated, may have a competitive advantage over us and may continue to draw large amounts of funds away from traditional banking institutions, with a continuing adverse effect on the banking industry in general.
Human Capital Resources
Our business is built on relationships with our customers, our community, and most of all, our employees. We are committed to providing quality service and products to the consumers and businesses within the markets we serve. We strive to create superior shareholder value by attracting and retaining exceptional employees who are highly motivated and well trained.
Our compensation strategy provides a total rewards structure that reflects position responsibilities, is competitive with the external market, and is capable of attracting, retaining, and motivating our employees. We provide a comprehensive benefits package for eligible employees which includes group health (medical, dental, and vision) insurance including a health savings account option, paid time off, short and long term disability insurance, life insurance and a 401(k) plan in which we provide a matching contribution. We also offer eligible employees participation in our Employee Stock Ownership Plan (ESOP) as well as our Long Term Incentive plan (LTI) in order to better align employee and shareholder interests.
We provide employees with robust training programs that promote employee development and effectiveness by providing high-quality curriculums designed to meet individual, departmental and Bank-wide objectives. This includes mentorships, 1-on-1 job shadowing, classroom training, and computer-based training.
We believe employing a diverse and inclusive workforce strengthens our ability to serve our customers and our communities, which is a key component of our success. To that end, we are a proud equal opportunity employer committed to attracting, retaining and promoting employees regardless of sex, sexual orientation, gender identity, race, color, national origin, age, religion and physical ability. We do not tolerate illegal discrimination or harassment and encourage employees to immediately report any violations to management and human resources.
As of December 31, 2022, we had 331 full-time and seven part-time employees. None of our employees are represented by any collective bargaining unit or are parties to a collective bargaining agreement. We believe that our relations with our employees are good.
Available Information
Our filings with the Securities and Exchange Commission (the “SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments thereto, are available on our website as soon as reasonably practicable after the reports are filed with or furnished to the SEC. Copies can be obtained free of charge in the “Investor Relations” section of our website at www.investarbank.com. Our SEC filings are also available through the SEC’s website www.sec.gov. Copies of these filings are also available by writing to us at the following address:
Investar Holding Corporation
P.O. Box 84207
Baton Rouge, Louisiana 70884-4207
1A. Risk Factors
Our business is subject to risk. In addition to the other information contained in this Annual Report on Form 10-K, including management’s discussion and analysis of financial condition and results of operations and our financial statements and the notes thereto, investors should consider the following risks when evaluating whether to invest in our common stock. If any of the following risks occur, whether alone or in combination, our business, financial condition, results of operations, cash flows and growth prospects could be materially and adversely affected. Additional risks that we do not presently know of or currently deem immaterial may also adversely affect our business, financial condition, results of operations, cash flows and growth prospects.
Risks Related to our Business
As a business operating in the financial services industry, our business and operations may be adversely affected by prevailing economic conditions and geopolitical matters.
Our financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services we offer, is highly dependent upon the business environment in the primary markets where we operate and in the U.S. as a whole. We are facing an uncertain economic environment. While disruptions caused directly by the COVID-19 pandemic decreased during 2022 and the economy continued to recover from pandemic lows, the U.S. economy experienced rapidly rising inflation and interest rates, labor shortages, supply chain issues and volatile commodity and financial markets, exacerbated by the Russian invasion of Ukraine that began in February 2022. During the entirety of 2021, the Federal Reserve’s federal funds target rate was 0% to 0.25% and it remained at that rate until March 2022. During 2022, the Federal Reserve increased the federal funds target rate seven times from a range of 0% to 0.25% to a range of 4.25% to 4.50%. The Federal Reserve increased the target rate again on February 1, 2023 to 4.50% to 4.75% and may increase the rate additional times during 2023. Also during 2022, the S&P 500 Index declined approximately 19%. The U.S. government reached the statutory debt limit on January 19, 2023 and the U.S. Department of the Treasury began to implement extraordinary measures to meet the obligations of the U.S. Treasury officials have projected that extraordinary measures should be effective until June 2023, although the exact time is uncertain. If the U.S. Congress does not act to raise the statutory debt limit, the federal government may be forced to shut down and the U.S. may default on its debt.
Uncertain economic and market conditions can also be caused by declines in economic growth, business activity, investor or business confidence, declines in real estate values, pandemics (such as the COVID-19 pandemic and resurgences of COVID-19 outbreaks) or fear of pandemics, rising unemployment, increases in the cost of credit and capital as experienced during 2022, limitations on the availability of credit and capital, natural disasters, or a combination of these or other factors.
In addition, geopolitical matters, including international political unrest, disruptions in international trade patterns, and slow growth in sectors of the global economy, as well as acts of terrorism, war and other violence could result, and in the case of the war in Ukraine, has resulted, in disruptions or volatility in the economy and financial and commodity markets.
Economic uncertainty and negative events in the economy or in geopolitical matters could have a material adverse effect on our business, results of operations and financial condition, including our liquidity position. Among other things, they may result in higher than expected loan delinquencies, a decline in the value of collateral securing our loans, instability in our deposit base, further increases in our costs of capital, disruptions in our ability to complete acquisitions, and a decline in demand for our products and services. They may cause us to incur losses, including losses on loans beyond those provided for in our allowance for loan losses, and losses in our investment securities portfolio, impairments of assets including goodwill, and may adversely impact our regulatory capital.
Changes in interest rates could have an adverse effect on our profitability.
The majority of our assets and liabilities are monetary in nature and, as a result, we are subject to significant risk from changes in interest rates. Changes in interest rates may affect our net interest income as well as the valuation of our assets and liabilities. We cannot predict with certainty changes in interest rates, which are affected by many factors beyond our control, including inflation, recession, unemployment, money supply, competition for loans and deposits, domestic and international events, changes in the United States and other financial markets, and the policies of the Federal Reserve. Inflation reached a near 40-year high in late 2021, driven in large part by economic recovery from the ongoing COVID-19 pandemic, and continued to be high during 2022 and into 2023. In response, the Federal Reserve raised interest rates seven times in 2022 and on February 1, 2023, as described above, which resulted in an increase in market interest rates, and may increase the rate additional times during 2023. Our earnings depend significantly on our net interest income, which is the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings. We expect to periodically experience “gaps” in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. In either event, if market interest rates move contrary to our position, this “gap” may work against us, and our earnings may be adversely affected. When interest-bearing liabilities mature or reprice more quickly, or to a greater degree than interest-earning assets in a period, an increase in interest rates could reduce net interest income. Similarly, when interest-earning assets mature or reprice more quickly, or to a greater degree than interest-bearing liabilities, falling interest rates could reduce net interest income.
Additionally, an increase in the general level of interest rates may also, among other things, adversely affect our current borrowers’ ability to repay variable rate loans, the demand for and our ability to originate loans, negatively affect the value of our investment securities portfolio, and decrease loan prepayment rates, or could increase the cost of the Company’s deposits and borrowings. For example, during the rapidly rising interest rate environment in 2022, comparing the twelve months ended December 31, 2021 and December 31, 2022, respectively, our yield on interest-earning assets increased from 4.02% to 4.28% while the cost of our total interest-bearing liabilities increased from 0.67% to 0.84%, producing a 14 basis point increase in our net interest margin from 3.53% to 3.67%. During 2022, as we raised rates offered on deposits and incurred higher costs on our borrowings, comparing the three months ended December 30, 2021 and the three months ended December 31, 2022, respectively, our yield on interest-earning assets increased from 3.95% to 4.57% while the cost of our total interest-bearing liabilities increased from 0.52% to 1.45%, producing a seven basis point decrease in our net interest margin from 3.57% to 3.50%. We may experience additional pressure on our net interest margin during 2023 if our cost of funds increases faster than the yield on our interest-earning assets. Additionally, due in large part to higher interest rates and market volatility during 2022, at December 31, 2022, unrealized losses in our investment portfolio totaled $62.5 million. These losses may continue or worsen during 2023, and we may experience realized losses in our portfolio.
An increase in the general level of interest rates could not only result in increased loan defaults, foreclosures and charge-offs, but also necessitate further increases to the allowance for loan losses. At the same time, the marketability and value of the property securing a loan may be adversely affected by any reduced demand resulting from higher interest rates. Further, when we place a loan on nonaccrual status, we reverse any accrued but unpaid interest receivable, which decreases interest income, but we continue to have a cost to fund the loan, which is reflected as interest expense, without any interest income to offset the associated funding expense. Thus, an increase in the amount of nonperforming assets would have an adverse impact on net interest income.
Conversely, a decrease in the general level of interest rates may lead to, among other things, prepayments on our loan and mortgage-backed securities portfolios as borrowers refinance their loans at lower rates, lower rates on new loans, lower rates on existing variable rate loans, and lower yields on investment securities, which could result in decreased yields on earning assets. Volatility in interest rates may increase competition for deposits and raise the cost of deposits.
Although our asset-liability management strategy is designed to control and mitigate exposure to the risks related to changes in the general level of market interest rates, we may not be able to accurately predict the likelihood, nature and magnitude of those changes or how and to what extent they may affect our business. We also may not be able to adequately prepare for or compensate for the consequences of such changes. Any failure to predict and prepare for changes in interest rates or adjust for the consequences of these changes may adversely affect our earnings and capital levels. For additional information, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Interest Rate Risk.
Inflation and rising prices may continue to adversely affect our results of operations and financial condition.
Inflation reached a near 40-year high in late 2021, and high levels of inflation persisted during 2022 and may continue in 2023. The U.S. Bureau of Labor Statistics reported that the 12-month percent change in the Consumer Price Index for All Urban Consumers (not seasonally adjusted) for all items was 6.5% for December 2021 to December 2022, 7.0% for December 2020 to December 2021, 1.4% for December 2019 to December 2020, and 2.3% for December 2018 to December 2019. Inflation increases our borrower’s costs of living and costs of doing business, which may make it more difficult for them to repay their loans, increasing our credit risk. Inflation also increases many of our operating costs. When the rate of inflation accelerates, there is an erosion of consumer and customer purchasing power. Accordingly, this could impact our business by reducing our tolerance for extending credit, and our customer’s desire to obtain credit, or causing us to incur additional provisions for loan losses resulting from a possible increased default rate. Inflation may lead to lower loan re-financings. In addition, inflation has led to the Federal Reserve raising interest rates during 2022 and 2023, as discussed above.
Our allowance for loan losses may prove to be insufficient to absorb losses inherent in our loan portfolio, and we may be required to further increase our provision for loan losses. This risk may be heightened by our adoption of the Current Expected Credit Loss accounting standard effective January 1, 2023.
Our business depends on our ability to successfully measure and manage credit risk. As a lender, we are exposed to the risk that the principal of and interest on a loan will not be paid timely or at all, and that the value of any collateral supporting a loan will be insufficient to cover any exposure to loss on a loan. Management maintains an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, to absorb credit losses in the loan portfolio. The determination of the appropriate level of the allowance is inherently subjective, involves a high degree of judgment and complexity, and requires us to make significant estimates, all of which are subject to material changes, particularly in uncertain economic environments as described above.
In June 2016, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard (Accounting Standards Update “ASU” 2016-13), referred to as Current Expected Credit Loss (“CECL”) that requires that the measurement of all expected credit losses for financial assets held at the reporting date be based on historical experience, current conditions, and reasonable and supportable forecasts, and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, the new standard amends the accounting for credit losses on purchased financial assets with credit deterioration. ASU 2016-13 became effective for us, as a smaller reporting company, on January 1, 2023. Please refer to Note 1. Summary of Significant Accounting Policies – Recent Accounting Pronouncements, in the Notes to Consolidated Financial Statements contained in Item 8. Financial Statements and Supplementary Data for additional discussion. Upon adoption of ASU 2016-13, we will record a one-time cumulative adjustment to increase our allowance for credit losses and reduce retained earnings, which will be reflected on our balance sheet and will not impact our income statement. We expect that the transition will result in a 20% to 30% increase in the allowance for credit losses on January 1, 2023, and a corresponding decrease in retained earnings of the after-tax amount. The adjustment to allowance for credit losses is an estimate and subject to refinement based on updates to quantitative or qualitative input assumptions or loss estimation factors. A failure to effectively measure the impact of the new CECL accounting standard may result in significant overstatement or understatement of our allowance for credit losses, and in the event of an understatement, may necessitate that we significantly increase our allowance for credit losses, which could adversely affect our net income.
The CECL methodology requires that lifetime “expected credit losses” be recorded at the time the financial asset is originated or acquired, and be adjusted each period for changes in expected lifetime credit losses. The CECL methodology replaces multiple prior impairment models under U.S. GAAP that generally required that a loss be “incurred” before it was recognized, and represents a significant change from prior U.S. GAAP. Our ongoing estimates of expected credit losses will depend upon our models and assumptions, existing and forecasted macroeconomic conditions and the credit quality, composition and other characteristics of our loan and other applicable portfolios. We believe these factors are likely to cause variability in our expected credit losses under CECL compared to previous GAAP, and therefore an increase in the variability of our period-to-period net income. We believe that CECL is also likely to reduce comparability across financial services companies due to the ability to adopt different measurement approaches for expected credit losses and different economic assumptions used in each of the companies’ models. Our initial adjustment to the allowance for credit losses at the transition date may vary from our estimate due to refinements in quantitative or qualitative input assumptions or loss estimation factors.
Commercial and industrial and commercial real estate loans generally are viewed as having more risk of default than residential real estate loans or other loans or investments. These types of loans are also typically larger than residential real estate loans and other consumer loans. Because the loan portfolio contains a significant number of commercial and industrial and commercial real estate loans with relatively large balances, the deterioration of a material amount of these loans may cause a significant increase in our allowance for loan losses, non-performing assets, and/or past due loans. An increase in our allowance for loan losses, non-performing assets, and/or past due loans could result in a loss of earnings, or an increase in loan charge-offs, which would have an adverse impact on our results of operations and financial condition.
Inaccurate management assumptions, including with respect to economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require us to increase our allowance for loan losses. In addition, bank regulatory agencies periodically review the allowance for loan losses and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. Finally, if actual charge-offs in future periods exceed the allowance for loan losses, we will need additional provisions to increase the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and, possibly, capital and may have a material adverse effect on our business, financial condition, results of operations and growth prospects.
The FDIC, Federal Reserve and the OCC issued a final rule to allow a banking organization to elect to phase in the regulatory capital impact of CECL over a three-year period commencing with time of adoption of the new standard. We did not make the election to phase in the impact of CECL on our regulatory capital calculations because we do not expect the adoption of CECL to have a significant impact on our regulatory capital ratios.
Our business strategy includes the continuation of our multi-state growth plans, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively.
We have grown our business primarily through de novo branching and through the acquisition of other financial institutions. Since our bank was founded in June 2006, through December 31, 2022, we have opened 14 de novo branches, completed seven whole bank acquisitions, and acquired two branch locations. We have also expanded our operations outside our historical south Louisiana base and into Texas and Alabama, progressing towards our goal to build a premier regional community bank. Our most recent acquisition was completed on April 1, 2021 when we acquired Cheaha Financial Group, Inc., headquartered in Oxford, Alabama, and its wholly-owned subsidiary, Cheaha Bank, which served the residents of Calhoun County, Alabama through four branch locations. We intend to continue to pursue a multi-state growth strategy for our business primarily through attractive acquisition opportunities as well as continue to pursue organic growth throughout our franchise. Our growth prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies when expanding their franchise, including the following:
| • |
De Novo Branching; Branch Acquisitions. There are considerable costs involved in opening branches, and new branches generally do not generate sufficient revenues to offset their costs until they have been in operation for at least a year or more. Accordingly, our de novo branches can be expected to negatively impact our earnings for some period of time until the branches reach certain economies of scale. Our expenses could be further increased if we encounter delays in opening any of our de novo branches. We may be unable to accomplish future de novo branch expansion plans due to a lack of available satisfactory sites, difficulties in acquiring such sites, increased expenses or loss of potential sites due to complexities associated with zoning and permitting processes, failure to obtain regulatory approval, or other factors. We may also be unable to identify and acquire suitable operating branches. Finally, we have no assurance our de novo branches or branches that we may acquire will maintain or achieve deposit levels, loan balances or other operating results necessary to avoid losses or produce profits. Our growth and de novo branching strategy necessarily entails growth in overhead expenses as we routinely add new offices and staff. During the last three fiscal years, we have opened two de novo branches. We do not expect to open de novo branches in 2023. |
| • |
Expansion into New Markets. Prior to our acquisition of Mainland Bank in the first quarter of 2019, we operated exclusively in Louisiana. With our acquisition of Mainland Bank, we entered Texas, and we subsequently entered Alabama with our acquisition of Bank of York in November 2019. The financial services industry in these areas is highly competitive, and the challenges of operating in new markets and multiple states may be greater than we anticipate. |
| • |
Acquisition and Integration Risks. An acquisition strategy involves substantial risks and uncertainties including: |
| ◦ |
the time and costs of evaluating potential acquisition candidates and new markets, negotiating transactions, and related diversion of management’s attention from day-to-day operations; |
| ◦ |
our ability to continue to finance acquisitions and possible dilution to our existing shareholders; |
| ◦ |
potential for acquisition agreements, once signed, not to be completed due to inability to obtain required regulatory approvals, third-party litigation, lack of shareholder approval if required, failure of other conditions to closing, agreement of the parties, or other reasons; |
| ◦ |
unanticipated difficulties in integrating acquired businesses, including potential losses of customers and employees, higher than expected integration costs, and inability to maintain and increase market share at new locations; and |
| ◦ |
potential differences between management’s expectations regarding how an acquired business will perform and actual results once acquired, which may result in lower than expected revenues, inability to achieve expected cost savings and synergies, higher than expected liabilities and costs, impairments of goodwill, and losses. |
| • |
Organic Growth Risks. As we continue to pursue organic growth at our existing and new or acquired locations, we may be unable to successfully maintain loan quality, obtain deposits at attractive rates, attract and retain personnel to implement and oversee such growth, or maintain an efficient overhead cost structure. We may also introduce new products and services that do not produce projected profits and may result in losses. |
Failure to successfully address these issues relating to our growth strategy could have a material adverse effect on our financial condition and results of operations. Also, if our growth occurs more slowly than anticipated or declines, our operating results could be materially adversely affected.
Changes in retail distribution strategies and consumer behavior may adversely impact our business, financial condition and results of operations.
We have significant investments in our physical branch network, including in bank premises and equipment as well as in our branch work force. Advances in technology as well as changing customer preferences for remote methods of accessing our products and services could decrease the value of our branch network and may cause us to further change our retail distribution strategy, and close, consolidate or sell certain branches or parcels of land held for future branch locations. These actions could lead to losses on these assets or adversely impact the carrying value of long-lived assets and may lead to expenditures to reconfigure remaining branches. Any changes in our branch network strategy could adversely impact our business if it results in the loss of customers.
In recent periods, we have focused on enhancing our online banking platform and plan to continue to introduce new technologies, with the goal of delivering products and services more efficiently with fewer branches and people. We closed one branch in 2020, two branches in 2021, and an additional two branches in 2022. During 2022, we sold three tracts of land that were being held for future branch locations. On July 15, 2022, we entered into a Purchase and Assumption Agreement to sell certain assets, deposits and other liabilities associated with the Alice, Texas and Victoria, Texas locations to First Community Bank. We completed the transaction on January 27, 2023. We could incur material losses in the future due to the closure or consolidation of branches or sale of land held for future branch locations.
Our business is concentrated in southern Louisiana, southeast Texas, and Alabama, and an economic downturn affecting these areas may magnify the adverse effects and consequences to us.
We currently conduct our operations primarily in southern Louisiana, and more specifically, in the Baton Rouge, New Orleans, Lafayette and Lake Charles metropolitan areas, in the greater Houston, Texas area, and in Alabama. As of December 31, 2022, our primary markets were south Louisiana (approximately 76% of our total deposits of $2.1 billion), southeast Texas (approximately 9% of our total deposits) and Alabama (approximately 15% of our total deposits). At December 31, 2022, approximately 63%, 6%, and 5% of the secured loans in our total loan portfolio were secured by properties and other collateral located in Louisiana, Texas and Alabama, respectively.
This geographic concentration imposes a greater risk to us than to our competitors in the area who maintain significant operations outside of our selected markets. Accordingly, any regional or local economic downturn, or natural or man-made disaster, that affects southern Louisiana, southeast Texas, Alabama, or existing or prospective property or borrowers in such areas may affect us and our profitability more significantly and more adversely than our more geographically diversified competitors.
Much of our business development and marketing strategy is directed toward fulfilling the banking and financial services needs of small to medium-sized businesses. Such businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities. If economic conditions negatively impact our selected markets and these businesses are adversely affected, our financial condition and results of operations may be negatively affected.
The ongoing COVID-19 pandemic, or a similar health crisis, may adversely affect our business, employees, borrowers, depositors, counterparties and third-party service providers.
The COVID-19 pandemic and related governmental control and stimulus measures severely disrupted financial markets and overall economic conditions in 2020 and 2021. While the impact of the pandemic and the associated uncertainties remained in 2022 and remain in 2023, there has been significant progress made with COVID-19 vaccines, which has resulted in the easing of restrictive measures in the U.S. At the same time, many industries have been experiencing supply chain disruptions and labor shortages. Inflation increased substantially in 2021 and 2022, and oil and gas prices have also been volatile due in part to the pandemic, and in 2022 due to the war in Ukraine. Differing variants of the COVID-19 virus continue to emerge and resurgences have occurred and may occur in the future. We cannot predict the extent to which individuals may decide to restrict their activities as a result of evolving pandemic developments, the extent to which governments may reinstitute certain restrictions, nor what future impact evolving pandemic developments or similar health crises may have on the economy or our business.
As part of its efforts to relieve pandemic economic stresses, the U.S. government instituted the Paycheck Protection Program (“PPP”) administered by the Small Business Administration (“SBA”). We participated as a lender in the program beginning in the second quarter of 2020 and made loans totaling $178.0 million under the program. As of December 31, 2022, we had remaining PPP loans outstanding with a balance of $1.7 million. While most of our PPP loans were paid by the SBA’s guaranty under the program, the SBA may find that there was a deficiency in the manner in which the loan was handled by us, and may seek to recover any related losses. In addition, some banks have been subject to litigation regarding their processing of PPP loan applications. Any such recovery efforts by the SBA or litigation related to the PPP program could have a material adverse effect on our business and reputation.
Adverse economic factors affecting particular industries could have a negative effect on our customers and their ability to make payments to us.
Certain industry-specific economic factors may also adversely affect us. For example, the energy sector, which is historically cyclical, has experienced significant volatility in oil and gas prices. While we consider our direct exposure to the energy sector not to be significant, comprising approximately 1.8% of total loans, excluding PPP loans, at December 31, 2022, continued oil price volatility could have further negative impacts on general economic conditions, particularly in our south Louisiana and southeast Texas markets, which could have a material adverse effect on our business, financial condition, and results of operations.
We have a significant number of loans secured by real estate, and a downturn in the real estate market could result in losses and negatively impact our profitability.
At December 31, 2022, approximately 79% of our total loan portfolio had real estate as a primary or secondary component of the collateral securing the loan. The real estate provides an alternate source of repayment in the event of a default by the borrower, but its value may deteriorate during the time the credit is extended. Declines in real estate values in our markets could significantly impair the value of the particular collateral securing our loans and our ability to sell the collateral upon foreclosure for an amount necessary to satisfy the borrower’s obligations to us. Furthermore, in a declining real estate market, we often will need to further increase our allowance for loan losses to address the deterioration in the value of the real estate securing our loans. Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations, cash flows and growth prospects.
Commercial real estate loans may expose us to greater risks than our other real estate loans.
Our loan portfolio includes commercial real estate loans, which are secured by owner-occupied and nonowner-occupied commercial properties. As of December 31, 2022, our owner-occupied commercial real estate loans totaled $445.1 million, or 21.1% of our total loan portfolio and our nonowner-occupied commercial real estate loans totaled $513.1 million, or 24.4% of our total loan portfolio.
Commercial real estate loans typically depend on the successful operation and management of the businesses that occupy these properties or the financial stability of tenants occupying the properties. Nonowner-occupied commercial real estate loans typically are dependent, in large part, on the owner’s ability to rent the property and the ability of the tenants to pay rent, whereas owner-occupied commercial real estate loans typically are dependent, in large part, on the success of the owner’s business. Cash flows, which may include proceeds from sales of commercial real estate, may be affected significantly by general economic conditions. Weak economic conditions may impair the borrower’s business operations and typically slow the execution of new leases. Such economic conditions may also lead to existing lease turnover. As a result of these factors, vacancy rates for retail, office and industrial space may increase. High vacancy rates could also result in rents falling. The combination of these factors could result in deterioration in the fundamentals underlying the commercial real estate market and the deterioration in value of some of our loans. These loans expose a lender to greater credit risk than loans secured by residential real estate because the collateral securing these loans typically cannot be liquidated as easily as residential real estate. If we foreclose on these loans, our holding period for the collateral typically is longer than for a 1-4 family residential property because there are fewer potential purchasers of the collateral. Additionally, nonowner-occupied commercial real estate loans generally involve relatively large balances to single borrowers or related groups of borrowers. Accordingly, charge-offs on nonowner-occupied commercial real estate loans may be larger on a per loan basis than those incurred with our residential or consumer loan portfolios. Unexpected deterioration in the credit quality of our commercial real estate loan portfolio would require us to increase our provision for loan losses, which would reduce our profitability and could materially adversely affect our business, financial condition, results of operations, cash flows and growth prospects.
Commercial and industrial loans may expose us to greater risk than other loans.
Commercial and industrial loans primarily consist of working capital lines of credit and equipment loans, typically secured by accounts receivable or inventory, or the relevant equipment. Repayment of these loans generally comes from the generation of cash flow as the result of the borrower’s business operations. Commercial lending generally involves different risks from those associated with commercial real estate lending or construction lending. Although commercial loans may be collateralized by business assets (including real estate, if available as collateral), the repayment of these types of loans depends primarily on the creditworthiness and projected cash flow of the borrower (and any guarantors). Thus, the general business conditions of the local economy and the borrower’s ability to sell its products and services, thereby generating sufficient operating revenue to repay us under the agreed upon terms and conditions, are the chief considerations when assessing the risk of a commercial and industrial loan. The liquidation of collateral, if any, is considered a secondary source of repayment because equipment and other business assets may, among other things, be obsolete or of limited resale value. Additionally, as of December 31, 2022 36% of our commercial and industrial loans were variable rate loans; rising interest rates increase interest payments due on such loans and may increase the risk of default by the borrower.
Commercial and industrial loans also include public finance loans made to governmental entities, which can be taxable or tax-exempt, for purposes including debt refinancing, economic development, quality of life projects, short-term cash-flow needs, and infrastructure enhancements, among other things. Public finance loans generally are repaid using pledged revenue sources including income tax, property tax, sales tax, and utility revenue, among other sources. Accordingly, repayment depends upon the financial stability and tax or revenue generating capacity of the particular revenue source. Although public finance loans are less than 5% of our loan portfolio as of December 31, 2022, they have grown in recent periods.
Loss of our senior executive officers or other key employees and our inability to recruit or retain suitable replacements could adversely affect our business, results of operations and growth prospects.
Our success depends significantly on the continued service and skills of our executive management team. During 2022 and as of March 6, 2023, due to individual health reasons, family reasons and other factors, we have completed a transition of our chief financial officer, chief accounting officer and general counsel, which required board and management time and attention. The implementation of our business and growth strategies also depends significantly on our ability to retain employees with experience and business relationships within their respective market areas, as well as on our ability to attract, motivate and retain highly qualified senior and middle management. Competition for employees is intense, particularly in light of the labor shortages caused by the COVID-19 pandemic. We could have difficulty replacing key employees with personnel with the combination of skills and attributes required to execute our business and growth strategies and who have ties to the communities within our market areas. The loss of any of our key personnel could therefore have a material adverse effect on our business, financial condition, results of operations and growth prospects.
We may be adversely impacted by the transition from LIBOR as a reference rate.
Our floating-rate funding, certain hedging transactions, and certain of the products we have offered, such as floating-rate loans, determine their applicable interest rate or payment amount by reference to the U.S. dollar London Interbank Offered Rate (“LIBOR”). Regulatory authorities responsible for the administration and publication of LIBOR have announced that the most commonly used LIBOR settings will cease to be published or cease to be representative after June 30, 2023. All other LIBOR settings ceased to be published as of December 31, 2021. The Bank discontinued originating LIBOR-based loans effective December 31, 2021.
As of December 31, 2022, approximately $30.9 million of our outstanding loans, and, in addition, certain derivative contracts, borrowings and other financial instruments, have attributes that are either directly or indirectly dependent on LIBOR. The transition from LIBOR has resulted in and could continue to result in added costs and employee efforts and could present additional risk. We are subject to litigation and reputational risks if we are unable to renegotiate and amend existing contracts with counterparties that are dependent on LIBOR, including contracts that do not have fallback language. The timing and manner in which each customer’s contract transitions to an alternative reference rate will vary on a case-by-case basis. There continues to be substantial uncertainty as to the ultimate effects of the LIBOR transition, including with respect to the acceptance and use of other benchmark rates. Since other benchmark rates are calculated differently, payments under contracts referencing new rates will differ from those referencing LIBOR, which may lead to increased volatility as compared to LIBOR. The transition has impacted our market risk profiles and required changes to our risk and pricing models, valuation tools, product design and hedging strategies. Failure to adequately manage the transition could have a material adverse effect on our business, financial condition and results of operations.
Hurricanes or other adverse weather conditions, as well as man-made disasters, could negatively affect our local markets or disrupt our operations, which may adversely affect our business and results of operations.
Our business is concentrated in southern Louisiana, in southeast Texas, and in Alabama. Our selected markets are susceptible to major hurricanes, floods, tropical storms, tornadoes and other natural disasters and adverse weather, the nature and severity of which can be difficult to predict. These natural disasters can disrupt our operations, cause widespread property damage, and severely depress the local economies in which we operate. For example, the historic flooding of Baton Rouge and surrounding areas in August 2016 had significant impacts in several markets in which we conduct business. Hurricane Harvey caused significant damage and flooding in Texas when it made landfall in August 2017. Hurricane Ida, which made landfall as a category 4 hurricane in Louisiana in August 2021, caused significant damage in the southern part of the state and also disrupted operations for certain of our customers. We recognized a material impairment related to a lending relationship with a group of related borrowers (the “Borrower”), collateralized by commercial real estate, inventory, and equipment. As a result of Hurricane Ida, the Borrower’s business operations were disrupted, and due to this impact on the Borrower’s operations, certain of the collateral supporting the loan relationship experienced a significant reduction in value. The severity and impact of future severe weather events are difficult to predict and may be exacerbated by global climate change. The 2010 Deepwater Horizon oil spill in the Gulf of Mexico illustrated that man-made disasters can also adversely affect economic activity in the markets in which we operate. Any economic decline as a result of a natural disaster, adverse weather, oil spill or other man-made disaster can reduce the demand for loans and our other products and services.
Such events could also affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans (resulting in increased delinquencies, foreclosures and loan losses), impair the value of collateral securing such loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses. The occurrence of any such event could, therefore, result in decreased revenue and loan losses that have a material adverse effect on our business, financial condition, results of operations and growth prospects.
Climate related events and legislative and societal responses regarding climate change present risks to our business.
Climate change may intensify severe weather events such as hurricanes and rainstorms that recur in our market areas, which may adversely impact our locations and business and those of our customers and suppliers. In addition, there has been an increased focus among businesses, consumers and investors regarding transitioning to renewable energy and a net zero economy. If we fail to adequately anticipate and address these changing preferences, our business could be adversely impacted. We are also subject to risks relating to potential new climate change-related legislation or regulations, which could increase our and our customers’ costs. The risks associated with these matters are continuing to evolve rapidly and the ultimate impact on our business is difficult to predict with any certainty.
Our failure to effectively implement new technologies could adversely affect our operations and financial condition.
Our industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. Our ability to compete successfully to some extent depends on whether we can implement new technologies to provide products and services to our customers more efficiently while avoiding significant operational challenges that increase our costs or delay full implementation, especially relative to our peers, many of which have greater resources to devote to technological improvements.
We rely on information technology and telecommunications systems, many of which are provided by third-party vendors.
The successful and uninterrupted functioning of our information technology and telecommunications systems is critical to our business. We outsource many of our major systems, such as data processing and deposit processing. If one of these third-party service providers terminates their relationship with us or fails to provide services to us for any reason or provides such services poorly, our business may be materially and adversely affected. In addition, we may be forced to replace such vendors, which could interrupt our operations and result in a higher cost to us.
Cyberattacks or other security breaches could adversely affect our operations, net income or reputation.
The financial services industry is particularly at risk for cybersecurity concerns because of the proliferation of new and emerging technologies, and the use of the internet and telecommunications technologies to conduct financial transactions. Additionally, increased use of internet and mobile banking products, and applications and plans to use or develop additional remote connectivity solutions increase our cybersecurity risks and exposure. In recent years we have increased our offerings of online and mobile banking services, including on-line bill payment, on-line funds transfers, mobile deposits, mobile wallets, video banking and Zelle®. These risks are heightened when customers use near real-time money transfer solutions such as Zelle®, where fraudulent and scam transactions can be more difficult to detect, prevent and recover. Additionally, as part of our banking business, we and certain of our third-party vendors collect, use and hold sensitive data concerning individuals and businesses with whom we have a banking relationship. Threats to data security, including unauthorized access and cyberattacks, rapidly emerge and change and are becoming increasingly sophisticated, exposing us to additional costs to secure our data in accordance with customer expectations and statutory and regulatory requirements. We could also experience a breach by intentional or negligent conduct on the part of our employees or other internal sources or by merchants using our customers’ debit and credit cards, software bugs, other technical malfunctions, or other causes. As a result of any of these threats, our computer systems and/or our customer accounts could become vulnerable to misappropriation of confidential information, account takeover schemes, ransomware, or cyberfraud. A ransomware attack could potentially shut down our data processing system and prevent us from accessing critical information. Our systems and those of our third-party vendors may become vulnerable to damage or disruption due to circumstances beyond our or their control, such as from catastrophic events, power anomalies or outages, natural disasters, network failures, and viruses and malware. Events may occur that increase our and other companies’ vulnerability with respect to cybersecurity risks, such as a sudden and substantial increase in remote work by employees as occurred during the early stages of the pandemic or may occur during adverse weather events, and as a result of increased cyberattacks by foreign actors, including in connection with the war in Ukraine.
A breach of security that results in unauthorized access to our data could result in violations of applicable privacy and other laws and expose us to disruptions in our daily operations as well as to data loss, litigation, damages, fines and penalties, regulatory sanctions, customer notification requirements, significant increases in compliance and insurance costs, increases in costs for measures to minimize and remediate these risks and breaches, loss of confidence in our security measures, and reputational damage, any of which could individually or in the aggregate have a material adverse effect on our business, results of operations, financial condition, prospects, and shareholder value.
We have attempted to address these concerns by backing up our systems as well as retaining qualified third-party vendors to test and audit our network. However, there can be no guarantees that our efforts and those of our third-party vendors will be successful in avoiding material problems with our information technology and telecommunications systems. We may not be able to anticipate all cyber security breaches or implement effective preventative measures against such breaches.
Loss of deposits or a change in deposit mix could increase the Company’s funding costs.
Deposits are a low cost and stable source of funding. We compete with banks and other financial institutions for deposits. Funding costs could increase if the Company loses deposits and replaces them with more expensive sources of funding, if customers shift their deposits into higher cost products, or if the Company needs to raise its interest rates to avoid losing deposits. Higher funding costs reduce the Company’s net interest margin, net interest income and net income. As interest rates began to rise significantly during 2022, competition for deposits increased, and the Bank raised rates it offered on deposits to remain competitive in its markets; these trends may continue during 2023.
We may need to raise additional capital in the future to execute our business strategy or to comply with regulatory requirements.
In addition to the liquidity that we require to conduct our day-to-day operations, the Company, on a consolidated basis, and the Bank, on a stand-alone basis, must meet regulatory requirements. Also, we may need capital to finance our growth, including through acquisitions. For example, in 2019, we sold $25.0 million of subordinated notes structured to qualify as Tier 2 capital, and $30.0 million of common stock, in part to fund acquisitions. If the Bank’s regulators deemed its capital levels to be too low for safety and soundness reasons or if the Bank were to be designated as “undercapitalized” or in a lower capitalization category than “undercapitalized,” it could be required to raise additional capital. For additional information, see Item 1. Business - Regulatory Capital Requirements - Prompt Corrective Action Regulations.
Our ability to raise additional capital depends on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry, market conditions and governmental activities, and on our financial condition and performance. Rising interest rates as experienced during 2022 increase our cost of new debt capital. Accordingly, there can be no assurances that we will be able to raise additional capital if needed or on terms acceptable to us. If we fail to maintain capital to meet regulatory requirements, our business, financial condition, results of operations and growth prospects could be materially and adversely affected.
Competition in our industry is intense, which could adversely affect our growth and profitability.
We face substantial competition in all areas of our operations from a variety of different competitors, many of which are larger and have substantially greater resources than we have, including higher total assets and capitalization, a more extensive and established branch network, greater access to capital markets and a broader offering of financial services. Such competitors primarily include national, regional and community banks within the various markets in which we operate. Because of their scale, many of these competitors can be more aggressive than we can on loan and deposit pricing. We also face competition from many other types of financial institutions, including savings and loans, credit unions, finance companies, brokerage firms, insurance companies, factoring companies and other financial intermediaries. Many of these entities have fewer regulatory constraints and may have lower cost structures than we do. There has been an increasing trend of credit unions acquiring banks. Credit unions are tax-exempt entities which provides an advantage when pricing loans and deposits. The acquisition of banks by credit unions may increase competition for customers and acquisitions.
Our industry could become even more competitive as a result of legislative and regulatory changes, as well as continued consolidation. Finally, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems, including Venmo and PayPal, and such as bitcoin and other types of cryptocurrencies. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and related income from those deposits. Disintermediation can also impact our lending business because of the growth of fintech companies delivering lending and other financial services. We may also lose employees to these competitors. Our ability to compete successfully depends on a number of factors, including customer convenience, quality of service, personal contacts, pricing and range of products. If we are unable to successfully compete, our business, financial condition, results of operations and growth prospects will be materially adversely affected.
If the goodwill that we record in connection with a business acquisition becomes impaired, it could require charges to earnings, which would have a negative impact on our financial condition and results of operations.
Goodwill represents the amount by which the cost of an acquisition exceeded the fair value of net assets we acquired in connection with the purchase of another financial institution. We review goodwill for impairment at least annually, or more frequently if events or changes in circumstances indicate that the carrying value of the asset might be impaired.
We determine impairment by comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. Any such adjustments are reflected in our results of operations in the periods in which they become known. As of December 31, 2022, our goodwill totaled $40.1 million. While we have not recorded any such impairment charges since we initially recorded the goodwill, there can be no assurance that our future evaluations of goodwill will not result in findings of impairment and related write-downs, which may have a material adverse effect on our financial condition and results of operations.
Factors outside our control could result in impairment of or losses with respect to our investment securities.
Under applicable accounting standards, we are required to review our securities portfolio periodically for the presence of other-than-temporary impairment, taking into consideration current market conditions, the extent and nature of changes in fair value, issuer rating changes and trends, volatility of earnings, current analysts’ evaluations, our ability and intent to hold securities until a recovery of fair value, as well as other factors. Adverse developments with respect to one or more of the foregoing factors may require us to deem particular securities to be other-than-temporarily impaired, with the credit related portion of the reduction in the value recognized as a charge to the results of operations in the period in which the impairment occurs. In addition, during 2022, increases in interest rates had a negative effect on the value of our investment securities portfolio, which may continue. As of December 31, 2022, unrecognized losses in our investment portfolio totaled $62.5 million. In addition, market volatility may make it difficult to value certain securities. Subsequent valuations, in light of factors prevailing at that time, may result in significant changes in the values of these securities in future periods. Any of these factors could require us to recognize further losses or impairments in the value of our securities portfolio, which may have an adverse effect on our results of operations in future periods.
A lack of liquidity could adversely affect our ability to fund operations and meet our obligations as they become due.
Liquidity is essential to our business. Liquidity risk is the potential that we will be unable to meet our obligations as they come due because of an inability to liquidate assets or obtain adequate funding. The primary source of the Bank’s funds are customer deposits and loan repayments, while borrowings are a secondary source of liquidity. Our access to deposits and other funding sources in adequate amounts and on acceptable terms is affected by a number of factors, including rates paid by competitors, returns available to customers on alternative investments and general economic conditions. Any decline in available funding could adversely impact our ability to originate loans, invest in securities, meet our expenses, pay dividends to our shareholders, or to fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our business, financial condition, results of operations and growth prospects.
We face significant operational and other risks related to our activities, which could expose us to negative publicity, litigation and/or regulatory action.
We are exposed to many types of operational risks, including, particularly as a financial institution, fraud risks and human error. Our fraud risks include fraud committed by external parties against the Company or our customers and fraud committed internally by our associates. Certain fraud risks, including identity theft and account takeover, may increase as a result of customers’ accounts or personally identifiable information being obtained through breaches of retailers’ or other third parties’ networks. There are inherent limitations to our risk management strategies, as there may exist, or develop in the future, risks that we have not appropriately anticipated, monitored or identified. If our risk management framework proves ineffective, we could suffer unexpected losses, we may have to expend resources detecting and correcting the failure in our systems and we may be subject to potential claims from third parties and government agencies. We may also suffer severe reputational damage. Any of these consequences could materially and adversely affect our business, financial condition or results of operations.
Because the nature of the financial services industry involves a high volume of transactions, certain systems or human errors may be repeated or compounded before they are discovered and successfully rectified. The Company’s necessary dependence upon automated systems to record and process our transaction volume may further increase the risk that technical flaws or associate tampering or manipulation of those systems will result in losses that are difficult to detect. The Company is further exposed to the risk that our third-party vendors may be unable to fulfill their contractual obligations or will be subject to the same risk of fraud or systems or human errors as we are. These risks include the cybersecurity risks discussed above.
Risks Related to Our Industry
We operate in a highly regulated environment, which could restrain our growth and profitability.
We are subject to extensive regulation and supervision under federal and state banking laws and regulations that govern almost all aspects of our operations, including, among other things, our lending practices, deposit-taking practices, capital structure, investment practices, dividend policy, operations and growth. The level of regulatory scrutiny that we are subject to may fluctuate over time, based on numerous factors, including as a result of changes in the political administrations. These laws and regulations, and the supervisory framework that oversees the administration of these laws and regulations, are primarily intended to protect consumers, depositors, the Deposit Insurance Fund and the banking system as a whole, and not shareholders and counterparties. Furthermore, new proposals for legislation continue to be introduced in the U.S. Congress that could further substantially increase regulation of the financial services industry, and impose restrictions on our operations and our ability to conduct business consistent with historical practices, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects. Our efforts to comply with new laws, regulations and standards typically result in increased expenses and a diversion of management time and attention. The information under the heading “Supervision and Regulation” in Item 1. Business, provides more information regarding the regulatory environment in which we and the Bank operate.
Federal regulators periodically examine our business, and we may be required to remediate adverse examination findings.
The financial services industry is subject to intense scrutiny from bank supervisors in the examination process and aggressive enforcement of regulations on both the federal and state levels. The Federal Reserve and the OCC periodically examine our business, including our compliance with laws and regulations. If, as a result of an examination, a federal banking agency were to determine that our financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of any of our operations had become unsatisfactory, or that we were in violation of any law or regulation, it may take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil monetary penalties against our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance and place us into receivership or conservatorship. If we become subject to any regulatory actions, it could have a material adverse effect on our business, results of operations, financial condition and growth prospects. Failure to comply with any applicable regulations and supervisory expectations related thereto could result in fines, penalties, lawsuits, regulatory sanctions, reputation damage or restrictions on business.
We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.
The ECOA, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The Department of Justice and other federal agencies enforce these laws and regulations, but private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. If an institution’s performance under the fair lending laws and regulations is found to be deficient, the institution could be subject to damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion, and restrictions on entering new business lines, among other sanctions. In addition, the OCC’s assessment of our compliance with the Community Reinvestment Act (“CRA”) is taken into account when evaluating any application we submit for, among other things, approval of the acquisition or establishment of a branch or other deposit facility, an office relocation, a merger or the acquisition of another financial institution. Our failure to satisfy our CRA obligations could, at a minimum, result in the denial of such applications and limit our growth.
We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.
The Bank Secrecy Act, the USA PATRIOT Act of 2001, and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate. The federal Financial Crimes Enforcement Network is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. We are also subject to increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control. If our policies, procedures and systems are deemed deficient, we would be subject to liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us. Any of these results could materially and adversely affect our business, financial condition, results of operations and growth prospects.
In addition, bank regulatory agencies consider the effectiveness of a financial institution’s anti-money laundering activities and other regulatory compliance matters when reviewing bank mergers and bank holding company acquisitions. Accordingly, non-compliance with the applicable regulations could materially impair the Company’s ability to enter into or complete mergers and acquisitions.
Our success depends on our ability to respond to the threats and opportunities of fintech innovation.
Fintech developments, such as bitcoin or other types of cryptocurrency and the development of alternative payment systems such as Venmo and PayPal, have the potential to disrupt the financial industry and change the way banks do business. Our success depends on our ability to adapt to the pace of the rapidly changing technological environment, which is crucial to retention and acquisition of customers. On July 31, 2018, the OCC announced it would grant limited-purpose national bank charters to fintech companies that offer bank products and services. The federal charter would allow fintech companies to operate nationwide under a single set of national standards, without needing to seek state-by-state licenses or joining with brick-and-mortar banks, which could have the effect of allowing fintech companies to more easily compete with us for financial products and services in the communities we serve. At present, the future of the OCC limited-purpose fintech charter is unclear. To date, the OCC has not approved any such charters and each application for a charter has been met with a lawsuit challenging the OCC’s authority to issue such charters.
We may be required to pay significantly higher FDIC deposit insurance premiums in the future.
The deposits of Investar Bank are insured by the FDIC up to legal limits and, accordingly, subject it to the payment of FDIC deposit insurance assessments. We are generally unable to control the amount of premiums that we are required to pay for FDIC deposit insurance. A bank’s regular assessments are determined by its risk classification, which is based on certain financial information and the level of supervisory concern that it poses. In order to maintain a strong funding position and restore the reserve ratios of the Deposit Insurance Fund, the FDIC has, in the past, increased deposit insurance assessment rates and charged a special assessment to all FDIC-insured financial institutions. Further increases in assessment rates or special assessments may occur in the future, especially if there are significant financial institution failures. Any future special assessments, increases in assessment rates or required prepayments in FDIC insurance premiums could reduce our profitability or limit our ability to pursue certain business opportunities, which could have an adverse effect on our business, financial condition and results of operations.
Our use of third-party vendors and our other ongoing third-party business relationships are subject to increasing regulatory requirements and attention.
We regularly use third-party vendors as part of our business. We also have substantial ongoing business relationships with other third parties. These types of third-party relationships are subject to increasingly demanding regulatory requirements and attention by our federal bank regulators. Regulation requires us to perform due diligence and ongoing monitoring and control over our third-party vendors and other ongoing third-party business relationships. In certain cases, we may be required to renegotiate our agreements with these vendors to meet these requirements, which could increase our costs. We expect that our regulators will hold us responsible for deficiencies in our oversight and control of our third-party relationships and in the performance of the parties with which we have these relationships. As a result, if our regulators conclude that we have not exercised adequate oversight and control over our third-party vendors or other ongoing third party business relationships or that such third parties have not performed appropriately, we could be subject to enforcement actions, including civil money penalties or other administrative or judicial penalties or fines as well as requirements for customer remediation, any of which could have a material adverse effect our business, financial condition or results of operations.
Risks Related to an Investment in our Common Stock
The market price of our common stock may be volatile, which may make it difficult for investors to sell their shares at the volume, prices and times desired.
The market price of our common stock may fluctuate substantially due to a variety of factors, many of which are beyond our control, including, without limitation:
| • |
actual, anticipated, or unanticipated variations in our quarterly and annual operating results, financial condition or asset quality; |
| • |
changes in general economic or business conditions, both domestically and internationally; |
| • |
the effects of, and changes in, trade, monetary and fiscal policies, including the interest rate policies of the Federal Reserve, or in laws and regulations affecting us; |
| • |
changes in the credit, mortgage and real estate markets; |
| • |
the number of securities analysts covering us; |
| • |
our creditworthiness; |
| • |
publication of research reports about us, our competitors, or the financial services industry generally, or changes in, or failure to meet, securities analysts’ estimates of our financial and operating performance, or lack of research reports by industry analysts or ceasing of coverage; |
| • |
changes in market valuations or earnings of companies that investors deemed comparable to us; |
| • |
the average daily trading volume of our common stock; |
| • |
future issuances of our common stock or other securities; |
| • |
changes in dividends on our common stock; |
| • |
additions or departures of key personnel; |
| • |
perceptions in the marketplace regarding our competitors and/or us; |
| • |
significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving our competitors or us; and |
| • |
other news, announcements or disclosures (whether by us or others) related to us, our competitors, our markets or the financial services industry. |
The stock market and, in particular, the market for financial institution stocks have experienced significant fluctuations in recent years. In addition, significant fluctuations in the trading volume in our common stock may cause significant price variations to occur. Increased market volatility may materially and adversely affect the market price of our common stock, which may make it difficult for investors to sell their shares at the volume, prices and times desired.
Shares eligible for future sale and shares we may issue in the future could adversely affect market prices of our common stock.
Shares of our common stock eligible for future sale, including those that may be issued in any private or public offering of our common stock, as consideration in acquisition transactions, or as incentives under incentive plans, could adversely affect market prices for our common stock. As of December 31, 2022, we had 9,901,847 shares outstanding and 350,430 shares subject to options granted under our incentive plan. Because our outstanding shares of common stock either were issued in an offering registered under the Securities Act of 1933, as amended (the “Securities Act”) or have been held for more than one year, such shares are freely tradable, except for shares held by our affiliates (approximately 7% of shares outstanding as of December 31, 2022) and 253,488 shares that represent unvested restricted shares under our incentive plan. Shares issued under our incentive plan will be available for sale into the public market, except for shares held by our affiliates. Shares held by our affiliates may be resold subject to the restrictions in Rule 144 of the Securities Act. In the future, we may issue additional shares of common stock to raise capital for growth or as consideration in acquisition transactions or for other purposes, and such shares may be registered under the Securities Act and freely tradable or may be issued in a private placement and registered for resale under the Securities Act.
Our dividend policy may change without notice, and our future ability to pay dividends is subject to restrictions.
Holders of our common stock are entitled to receive only such cash dividends as our board of directors may declare out of funds legally available for the payment of dividends. We have no obligation to continue paying dividends, and we may change our dividend policy at any time without notice to our shareholders. In addition, our existing and future debt agreements limit, or may limit, our ability to pay dividends. Under the terms of our 5.125% Fixed-to-Floating Rate Subordinated Notes due 2029, we may not pay a dividend if either our parent company or the Bank, both immediately prior to the declaration of the dividend and after giving effect to the payment of the dividend, would not maintain regulatory capital ratios that are as “well capitalized” levels for regulatory capital purposes. We are also prohibited from paying dividends upon and during the continuance of any Event of Default under such notes. Under the terms of our 5.125% Fixed-to-Floating Rate Subordinated Notes due 2032, we are prohibited from paying dividends upon and during the continuance of any Event of Default under such notes. Our ability to pay dividends may be limited on account of the junior subordinated debentures that we assumed through acquisitions. We must make payments on the junior subordinated debentures before any dividends can be paid on our common stock.
Since the Company’s primary asset is its stock of Investar Bank, we are dependent upon dividends from the Bank to pay our operating expenses, satisfy our obligations and to pay dividends on the Company’s common stock. Accordingly, any declaration and payment of dividends on common stock will substantially depend upon the Bank’s earnings and financial condition, liquidity and capital requirements, the general economic and regulatory climate and other factors deemed relevant by our board of directors. Furthermore, consistent with our strategic plans, growth initiatives, capital availability, projected liquidity needs, and other factors, we have made, and will continue to make, capital management decisions and policies that could adversely impact the amount of dividends, if any, paid to our common shareholders.
In addition, there are numerous laws and banking regulations that limit our and Investar Bank’s ability to pay dividends. For further discussion of the regulatory restrictions on our ability to pay dividends, see Item 1. Business – Supervision and Regulation – Dividends.
Our Restated Articles of Incorporation and By-laws, and certain banking laws applicable to us, could have an anti-takeover effect that decreases our chances of being acquired, even if our acquisition is in our shareholders’ best interests.
Certain provisions of our restated articles of incorporation and our by-laws, as amended, and federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire control of our organization or conduct a proxy contest, even if those events were perceived by many of our shareholders as beneficial to their interests. These provisions, and the corporate and banking laws and regulations applicable to us:
| • |
enable our board of directors to issue additional shares of authorized, but unissued capital stock. In particular, our board may issue “blank check” preferred stock with such designations, rights and preferences as may be determined from time to time by the board; |
| • |
enable our board of directors to increase the size of the board and fill the vacancies created by the increase; |
| • |
enable our board of directors to amend our by-laws without shareholder approval; |
| • |
require advance notice for director nominations and other shareholder proposals; and |
| • |
require prior regulatory application and approval of any transaction involving control of our organization. |
These provisions may discourage potential acquisition proposals and could delay or prevent a change in control, including circumstances in which our shareholders might otherwise receive a premium over the market price of our shares.
Our issuance of preferred stock could adversely affect holders of our common stock and discourage a takeover.
Our shareholders authorized our board of directors to issue up to 5,000,000 shares of preferred stock without any further action on the part of our shareholders. The board also has the power, without shareholder approval, to set the terms of any series of preferred stock that may be issued, including voting rights, dividend rights, preferences over our common stock with respect to dividends or in the event of a dissolution, liquidation or winding up and other terms. In the event that we issue preferred stock in the future that has preference over our common stock with respect to payment of dividends or upon our liquidation, dissolution or winding up, or if we issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of the holders of our common stock or the market price of our common stock could be adversely affected. In addition, the ability of our board of directors to issue shares of preferred stock without any action on the part of our shareholders may impede a takeover of us and prevent a transaction perceived to be favorable to our shareholders.
An investment in our common stock is not an insured deposit and is subject to risk of loss.
Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any deposit insurance fund or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this Annual Report on Form 10-K and is subject to the same market forces that affect the price of common stock in any company. As a result, an investor may lose some or all of his or her investment in our common stock.
Item 1B. Unresolved Staff Comments
Not applicable.
Our main office, which serves as our executive and operations center, is located at 10500 Coursey Boulevard in Baton Rouge, Louisiana. In addition, we operate 29 full-service branches. Our 21 branches in Louisiana are located in Ascension (1), East Baton Rouge (4), West Baton Rouge (1), Jefferson (2), Lafayette (2), Livingston (1), Orleans (1), St. Tammany (1), Tangipahoa (1), East Feliciana (2), West Feliciana (1), Evangeline (3) and Calcasieu (1) Parishes. Our two branches in Texas are located in Galveston (1) and Harris (1) Counties. Our six branches in Alabama are located in Calhoun (4) and Sumter (2) Counties, and one loan production office is located in Tuscaloosa County. We also have one stand-alone automated teller machine in Baton Rouge, Louisiana and one stand-alone interactive teller machine in Morgan City, Louisiana.
We own the building, known as Investar Tower, in which our main office is located, one loan production office, and all of our branch offices, with the exception of two leased branch locations in Louisiana and two leased branch locations in Texas. Each of our owned branch facilities is a stand-alone building with on-site parking and drive-up access, the majority of which are equipped with an automated teller machine or interactive teller machine. We believe that our facilities are in good condition and are adequate to meet our operating needs for the foreseeable future.
We also own a tract of land in each of the following Louisiana parishes: East Baton Rouge Parish; St. Mary Parish; and Ascension Parish. Each tract of land has been designated as either a future branch or stand-alone interactive teller machine location. The timing of the development of these tracts of land is uncertain.
From time to time we are party to ordinary routine litigation matters incidental to the conduct of our business. We are not presently party to, and none of our property is the subject of, any legal proceedings, the resolution of which we believe would have a material adverse effect on our business, financial condition, results of operations, cash flows, growth prospects or capital levels, nor were any such proceedings terminated during the fourth quarter of 2022.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is listed on the Nasdaq Global Market (the “Nasdaq”) under the symbol “ISTR.” As of March 6, 2023, there were approximately 648 holders of record of our common stock.
Dividend Policy
The Company has paid a quarterly dividend since 2011 and intends to continue to declare dividends on a quarterly basis. The declaration of dividends is at the discretion of our board of directors and will depend on our financial performance, future prospects, regulatory requirements and other factors deemed relevant by the board of directors.
Since we are a holding company with no material business activities, our ability to pay dividends is substantially dependent upon the ability of Investar Bank to transfer funds to us in the form of dividends, loans and advances. The Bank’s ability to pay dividends and make other distributions and payments to us depends upon the Bank’s earnings, financial condition, general economic conditions, compliance with regulatory requirements and other factors. In addition, the Bank’s ability to pay dividends to us is itself subject to various legal, regulatory and other restrictions. See Item 1. Business – Supervision and Regulation – Dividends, above for a discussion of the restrictions on dividends under federal banking laws and regulations. In addition, as a Louisiana corporation, we are subject to certain restrictions on dividends under the Louisiana Business Corporation Act. Generally, a Louisiana corporation may pay dividends to its shareholders unless, after giving effect to the dividend, either (1) the corporation would not be able to pay its debts as they come due in the usual course of business or (2) the corporations’ total assets are less than the sum of its total liabilities and the amount that would be needed, if the corporation were to be dissolved at the time of the payment of the dividend, to satisfy the preferential rights of shareholders whose preferential rights are superior to those receiving the dividend. In addition, our existing and future debt agreements limit, or may limit, our ability to pay dividends. Under the terms of our 5.125% Fixed-to-Floating Rate Subordinated Notes due 2029, we may not pay a dividend if either our parent company or the Bank, both immediately prior to the declaration of the dividend and after giving effect to the payment of the dividend, would not maintain regulatory capital ratios that are at “well capitalized” levels for regulatory capital purposes. We are also prohibited from paying dividends upon and during the continuance of any Event of Default under such notes. Under the terms of our 5.125% Fixed-to-Floating Rate Subordinated Notes due 2032, we are prohibited from paying dividends upon and during the continuance of any Event of Default under such notes. Finally, our ability to pay dividends may be limited on account of the junior subordinated debentures that we assumed through acquisitions. We must make payments on the junior subordinated debentures before any dividends can be paid on our common stock.
These restrictions do not, and are not expected in the future to, materially limit the Company’s ability to pay dividends to its shareholders in an amount consistent with the Company’s history of paying dividends.
Stock Performance Graph
The above graph compares the cumulative total shareholder return on the Company’s common stock over a measurement period beginning at the market close on the last trading day of 2017, with (i) the cumulative total return on the stocks included in the Russell 3000 Index and (ii) the cumulative total return on the stocks included in the S&P United States SmallCap Banks Index, which includes banks with market capitalizations of $250 million to $1 billion. The performance graph assumes that the value of the investment in our common stock, the Russell 3000 Index and the S&P United States SmallCap Banks Index was $100 at December 31, 2017 and that all dividends were reinvested.
| Index |
12/31/2017 |
6/30/2018 |
12/31/2018 |
6/30/2019 |
||||||||||||
| Investar Holding Corporation |
$ | 100.00 | $ | 114.73 | $ | 102.90 | $ | 98.96 | ||||||||
| Russell 3000 |
100.00 | 103.22 | 81.80 | 92.83 | ||||||||||||
| S&P US SmallCap Banks |
100.00 | 102.29 | 93.01 | 109.36 | ||||||||||||
| 12/31/2019 |
6/30/2020 |
12/31/2020 |
6/30/2021 |
|||||||||||||
| Investar Holding Corporation |
$ | 99.59 | $ | 60.17 | $ | 68.63 | $ | 94.98 | ||||||||
| Russell 3000 |
100.08 | 67.31 | 87.81 | 109.91 | ||||||||||||
| S&P US SmallCap Banks |
119.55 | 114.31 | 142.06 | 162.42 | ||||||||||||
| 12/31/2021 |
6/30/2022 |
12/31/2022 |
||||||||||||||
| Investar Holding Corporation |
$ | 76.39 | $ | 90.87 | $ | 89.34 | ||||||||||
| Russell 3000 |
119.40 | 99.26 | 102.62 | |||||||||||||
| S&P US SmallCap Banks |
176.16 | 137.95 | 140.08 | |||||||||||||
There can be no assurance that our common stock performance will continue in the future with the same or similar trends depicted in the performance graph above. We will not make or endorse any predictions as to future stock performance.
The information provided under the heading “Stock Performance Graph” shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to its proxy regulations or to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended, other than as provided in Item 201 of Regulation S-K. The information provided in this section shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
Issuer Purchases of Equity Securities
| Period |
(a) Total Number of Shares (or Units) Purchased(1) |
(b) Average Price Paid per Share (or Unit) |
(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs |
(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Be Purchased Under the Plans or Programs(2) |
||||||||||||
| October 1, 2022 to October 31, 2022 |
10,198 | $ | 20.17 | 10,198 | 386,714 | |||||||||||
| November 1, 2022 to November 30, 2022 |
4,414 | 22.00 | — | 386,714 | ||||||||||||
| December 1, 2022 to December 31, 2022 |
— | — | — | 386,714 | ||||||||||||
| 14,612 | $ | 20.72 | 10,198 | 386,714 | ||||||||||||
| (1) |
Includes 4,414 shares surrendered to cover the payroll taxes due upon the vesting of restricted stock. |
| (2) |
On April 21, 2022, the Company announced that its board of directors authorized the repurchase of an additional 400,000 shares of the Company’s common stock under its stock repurchase plan, and on September 21, 2022, the Company announced that its board of directors authorized an additional 300,000 shares of the Company’s common stock under its stock repurchase plan. |
Unregistered Sales of Equity Securities
Not applicable.
Securities Authorized for Issuance under Equity Compensation Plans
Please refer to the information under the heading “Securities Authorized for Issuance under Equity Compensation Plans” in Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, for a discussion of the securities authorized for issuance under the Company’s equity compensation plans.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This section presents management’s perspective on the financial condition and results of operations of Investar Holding Corporation (the “Company,” “we,” “our,” or “us”) and its wholly-owned subsidiary, Investar Bank, National Association (the “Bank”). The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and related notes and other supplemental information included herein. Certain risks, uncertainties and other factors, including those set forth under Item 1A. Risk Factors in Part I, and elsewhere in this Annual Report on Form 10-K, may cause actual results to differ materially from those projected results discussed in the forward-looking statement appearing in this discussion and analysis.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K, both in Management’s Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere, contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements include statements relating to our projected growth, anticipated future financial performance, changes in our allowance for loan or credit losses including due to the adoption of ASU 2016-13, anticipated future credit quality and our potential ability to achieve performance and strategic goals, as well as statements relating to the anticipated effects of these factors on our business, financial condition and results of operations. These statements can typically be identified through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “think,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature.
Our forward-looking statements contained herein are based on assumptions and estimates that management believes to be reasonable in light of the information available at this time. However, many of these statements are inherently uncertain and beyond our control and could be affected by many factors. Factors that could have a material effect on our business, financial condition, results of operations, cash flows and future growth prospects can be found in Item 1A. Risk Factors. These factors include, but are not limited to, the following, any one or more of which could materially affect the outcome of future events:
| • |
the significant risks and uncertainties for our business, results of operations and financial condition, as well as our regulatory capital and liquidity ratios and other regulatory requirements caused by business and economic conditions generally and in the financial services industry in particular, whether nationally, regionally or in the markets in which we operate, including risks and uncertainties caused by the ongoing COVID-19 pandemic, potential continued higher inflation and interest rates, supply and labor constraints, the war in Ukraine and uncertainty regarding whether the United States Congress will raise the statutory debt limit; |
| • |
our ability to achieve organic loan and deposit growth, and the composition of that growth; |
| • |
changes (or the lack of changes) in interest rates, yield curves and interest rate spread relationships that affect our loan and deposit pricing, including potential continued increases in interest rates in 2023; |
| • |
our ability to identify and enter into agreements to combine with attractive acquisition partners, finance acquisitions, complete acquisitions after definitive agreements are entered into, and successfully integrate and grow acquired operations; |
| • | the estimated 20% to 30% increase in our allowance for loan losses in the first quarter of 2023 and corresponding decrease in retained earnings of the after-tax amount, resulting from our adoption on January 1, 2023 of ASU 2016-13, and inaccuracy of the assumptions and estimates we make in establishing reserves for credit losses and other estimates; |
| • | changes in the quality or composition of our loan portfolio, including adverse developments in borrower industries or in the repayment ability of individual borrowers; |
| • | changes in the quality and composition of, and changes in unrealized losses in, our investment portfolio, including whether we may have to sell securities before their recovery of amortized cost basis and realize losses; |
| • |
the extent of continuing client demand for the high level of personalized service that is a key element of our banking approach as well as our ability to execute our strategy generally; |
| • |
our dependence on our management team, and our ability to attract and retain qualified personnel; |
| • | cessation of the one-week and two-month U.S. dollar settings of LIBOR as of December 31, 2021 and announced cessation of the remaining U.S. dollar LIBOR settings after June 30, 2023, and the related effect on our LIBOR-based financial products and contracts, including, but not limited to, hedging products, debt obligations, investments and loans; |
| • |
the concentration of our business within our geographic areas of operation in Louisiana, Texas and Alabama; |
| • |
concentration of credit exposure; |
| • |
any deterioration in asset quality and higher loan charge-offs, and the time and effort necessary to resolve problem assets; |
| • |
a reduction in liquidity, including as a result of a reduction in the amount of deposits we hold or other sources of liquidity; |
| • | ongoing disruptions in the oil and gas industry due to the significant fluctuations in the price of oil and natural gas; |
| • |
data processing system failures and errors; |
| • |
cyberattacks and other security breaches; |
| • |
potential impairment of our goodwill and other intangible assets; |
| • |
our potential growth, including our entrance or expansion into new markets, and the need for sufficient capital to support that growth; |
| • |
the impact of litigation and other legal proceedings to which we become subject; |
| • |
competitive pressures in the commercial finance, retail banking, mortgage lending and consumer finance industries, as well as the financial resources of, and products offered by, competitors; |
| • |
the impact of changes in laws and regulations applicable to us, including banking, securities and tax laws and regulations and accounting standards, as well as changes in the interpretation of such laws and regulations by our regulators; |
| • |
changes in the scope and costs of FDIC insurance and other coverages; |
| • |
governmental monetary and fiscal policies, including the potential for the Federal Reserve Board to raise target interest rates one or more times during 2023; |
| • |
hurricanes, tropical storms, tropical depressions, floods, winter storms, tornadoes, and other adverse weather events, all of which have affected our market areas from time to time; other natural disasters; oil spills and other man-made disasters; acts of terrorism, an outbreak or intensifying of hostilities including the war in Ukraine or other international or domestic calamities, acts of God and other matters beyond our control; and |
| • |
other circumstances, many of which are beyond our control. |
The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included herein. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements.
Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.
Overview
Through our wholly-owned subsidiary Investar Bank, National Association, we provide full banking services, excluding trust services, tailored primarily to meet the needs of individuals, professionals, and small to medium-sized businesses. Our primary areas of operation are south Louisiana (approximately 76% of our total deposits as of December 31, 2022), including Baton Rouge, New Orleans, Lafayette, Lake Charles, and their surrounding areas; southeast Texas, primarily Houston and its surrounding area and Alabama, including York and Oxford and their surrounding areas. Our Bank commenced operations in 2006 and we completed our initial public offering in July 2014. On July 1, 2019, the Bank changed from a Louisiana state bank charter to a national bank charter and its name changed to Investar Bank, National Association. Our strategy includes organic growth through high quality loans and growth through acquisitions, including whole-bank acquisitions and strategic branch acquisitions. We currently operate 29 full service branches comprised of 21 full service branches in Louisiana, two full service branches in Texas, and six full service branches in Alabama. We have completed seven whole-bank acquisitions since 2011 and regularly review acquisition opportunities. In addition to our branches acquired through acquisitions, during our last three fiscal years, we opened two de novo branch locations.
We closed five branches during our last three fiscal years as we continued to evaluate opportunities to improve our branch network efficiency, leverage our digital initiatives and further reduce costs. Four of the branches had been acquired, and the closures involved anticipated synergies that resulted in significant cost savings. In 2022, we sold these five former branch locations and three tracts of land that were being held for future branch locations. On January 27, 2023, we completed our previously announced sale of certain assets, deposits and other liabilities associated with our Alice, Texas and Victoria, Texas branch locations to First Community Bank in order to focus more on our core markets. Of the Bank’s entire branch network, these two locations were geographically the most distant from our Louisiana headquarters.
Our principal business is lending to and accepting deposits from individuals and small to medium-sized businesses in our areas of operation. We generate our income principally from interest on loans and, to a lesser extent, our securities investments, as well as from fees charged in connection with our various loan and deposit services. Our principal expenses are interest expense on interest-bearing customer deposits and borrowings, salaries and employee benefits, occupancy costs, data processing and other operating expenses. We measure our performance through our net interest margin, return on average assets, and return on average equity, among other metrics, while seeking to maintain appropriate regulatory leverage and risk-based capital ratios.
For certain GAAP performance measures, see “Certain Performance Indicators” below. We also monitor changes in our tangible equity, tangible assets, tangible book value per share, and our efficiency ratio, shown in the section “Certain Performance Indicators: Non-GAAP Financial Measures” below.
Certain Performance Indicators
|
|
As of and for the years ended December 31, |
||||||||||||||
| (In thousands, except share data) |
2022 | 2021(1) | 2020(1) | 2019(1) | 2018 | ||||||||||
| Financial Information |
|||||||||||||||
| Total assets |
$ | 2,753,807 | $ | 2,513,203 | $ | 2,321,181 | $ | 2,148,916 | $ | 1,786,469 | |||||
| Total stockholders' equity |
215,782 | 242,598 | 243,284 | 241,976 | 182,262 | ||||||||||
| Net interest income |
89,785 | 83,814 | 73,534 | 64,818 | 57,370 | ||||||||||
| Net income |
35,709 | 8,000 | 13,889 | 16,839 | 13,606 | ||||||||||
| Diluted earnings per share |
3.50 | 0.76 | 1.27 | 1.66 | 1.39 | ||||||||||
| Performance Ratios |
|||||||||||||||
| Return on average assets |
1.37 | % | 0.31 | % | 0.61 | % | 0.85 | % | 0.81 | % | |||||
| Return on average equity |
15.63 | 3.22 | 5.77 | 8.21 | 7.68 | ||||||||||
| Net interest margin |
3.67 | 3.53 | 3.49 | 3.51 | 3.61 | ||||||||||
| Dividend payout ratio |
10.31 | 40.26 | 19.69 | 13.55 | 12.09 | ||||||||||
| Capital Ratios |
|||||||||||||||
| Total equity to total assets |
7.84 | % | 9.65 | % | 10.48 | % | 11.26 | % | 10.20 | % | |||||
| Tangible equity to tangible assets(2) |
6.37 | 8.04 | 9.22 | 9.96 | 9.20 | ||||||||||
| (1) |
Certain performance indicators includes the effect of acquisitions from the date of each acquisition. On March 1, 2019, the Company acquired Mainland Bank, by merger with and into the Bank. On November 1, 2019, the Company acquired Bank of York, by merger with and into the Bank. On February 21, 2020, the Bank acquired two branches from PlainsCapital Bank. On April 1, 2021, the Company acquired Cheaha Financial Group, Inc. and its wholly-owned subsidiary Cheaha Bank, by merger with and into the Company and Bank, respectively. |
| (2) |
Non-GAAP financial measure. See reconciliation below. |
Certain Performance Indicators: Non-GAAP Financial Measures
Our accounting and reporting policies conform to accounting principles generally accepted in the United States, or GAAP, and the prevailing practices in the banking industry. However, we also evaluate our performance based on certain additional metrics. The efficiency ratio, tangible book value per share, and the ratio of tangible equity to tangible assets are not financial measures recognized under GAAP and, therefore, are considered non-GAAP financial measures.
Our management, banking regulators, financial analysts and investors use these non-GAAP financial measures to compare the capital adequacy of banking organizations with significant amounts of preferred equity and/or goodwill or other intangible assets, which typically stem from the use of the purchase accounting method of accounting for mergers and acquisitions. Tangible equity, tangible assets, tangible book value per share or related measures should not be considered in isolation or as a substitute for total stockholders’ equity, total assets, book value per share or any other measure calculated in accordance with GAAP. Moreover, the manner in which we calculate tangible equity, tangible assets, tangible book value per share and any other related measures may differ from that of other companies reporting measures with similar names. The following table reconciles, as of the dates set forth below, stockholders’ equity (on a GAAP basis) to tangible equity and total assets (on a GAAP basis) to tangible assets and calculates both our tangible book value per share and efficiency ratio (dollars in thousands).
| As of and for the years ended December 31, |
||||||||||||||||||||
| 2022 |
2021 |
2020 |
2019 |
2018 |
||||||||||||||||
| Total stockholders’ equity - GAAP |
$ | 215,782 | $ | 242,598 | $ | 243,284 | $ | 241,976 | $ | 182,262 | ||||||||||
| Adjustments: |
||||||||||||||||||||
| Goodwill |
40,088 | 40,088 | 28,144 | 26,132 | 17,424 | |||||||||||||||
| Core deposit intangible |
2,959 | 3,848 | 3,988 | 4,803 | 2,263 | |||||||||||||||
| Trademark intangible |
100 | 100 | 100 | 100 | 100 | |||||||||||||||
| Tangible equity |
$ | 172,635 | $ | 198,562 | $ | 211,052 | $ | 210,941 | $ | 162,475 | ||||||||||
| Total assets - GAAP |
$ | 2,753,807 | $ | 2,513,203 | $ | 2,321,181 | $ | 2,148,916 | $ | 1,786,469 | ||||||||||
| Adjustments: |
||||||||||||||||||||
| Goodwill |
40,088 | 40,088 | 28,144 | 26,132 | 17,424 | |||||||||||||||
| Core deposit intangible |
2,959 | 3,848 | 3,988 | 4,803 | 2,263 | |||||||||||||||
| Trademark intangible |
100 | 100 | 100 | 100 | 100 | |||||||||||||||
| Tangible assets |
$ | 2,710,660 | $ | 2,469,167 | $ | 2,288,949 | $ | 2,117,881 | $ | 1,766,682 | ||||||||||
| Total shares outstanding |
9,901,847 | 10,343,494 | 10,608,869 | 11,228,775 | 9,484,219 | |||||||||||||||
| Book value per share |
$ | 21.79 | $ | 23.45 | $ | 22.93 | $ | 21.55 | $ | 19.22 | ||||||||||
| Effect of adjustments |
(4.36 | ) | (4.25 | ) | (3.04 | ) | (2.76 | ) | (2.09 | ) | ||||||||||
| Tangible book value per share |
$ | 17.43 | $ | 19.20 | $ | 19.89 | $ | 18.79 | $ | 17.13 | ||||||||||
| Total equity to total assets |
7.84 | % | 9.65 | % | 10.48 | % | 11.26 | % | 10.20 | % | ||||||||||
| Effect of adjustments |
(1.47 | ) | (1.61 | ) | (1.26 | ) | (1.30 | ) | (1.00 | ) | ||||||||||
| Tangible equity to tangible assets |
6.37 | % | 8.04 | % | 9.22 | % | 9.96 | % | 9.20 | % | ||||||||||
| Efficiency ratio(1) |
||||||||||||||||||||
| Noninterest expense |
$ | 60,865 | $ | 63,062 | $ | 57,131 | $ | 48,168 | $ | 41,882 | ||||||||||
| Net interest income |
89,785 | 83,814 | 73,534 | 64,818 | 57,370 | |||||||||||||||
| Noninterest income |
18,350 | 12,042 | 12,096 | 6,216 | 4,318 | |||||||||||||||
| Efficiency ratio |
56.29 | % | 65.79 | % | 66.72 | % | 67.81 | % | 67.89 | % | ||||||||||
| (1) |
Calculated as noninterest expense divided by the sum of net interest income (before provision for loan losses) and noninterest income. |
Critical Accounting Estimates
The preparation of our consolidated financial statements in accordance with GAAP requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, income and expenses and related disclosure of contingent assets and liabilities. Although independent third parties are often engaged to assist us in the estimation process, management evaluates the results, challenges assumptions used and considers other factors which could impact these estimates. Actual results may differ from these estimates under different assumptions or conditions.
For more detailed information about our accounting policies, please refer to Note 1. Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements contained in Item 8. Financial Statements and Supplementary Data. The following discussion presents our critical accounting estimates, which are those estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. We believe that the judgments, estimates and assumptions that we use in the preparation of our consolidated financial statements are appropriate.
Allowance for Loan Losses. One of the accounting policies most important to the presentation of our financial statements relates to the allowance for loan losses and the related provision for loan losses. The allowance for loan losses is established as losses are estimated through a provision for loan losses charged to earnings. Through December 31, 2022, the allowance for loan losses is based on the amount that management believes will be adequate to absorb probable losses inherent in the loan portfolio based on, among other things, evaluations of the collectability of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect borrowers’ ability to pay. Another component of the allowance is losses on loans assessed as impaired under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 310, Receivables (“ASC 310”). The balance of the loans determined to be impaired under ASC 310 and the related allowance is included in management’s estimation and analysis of the allowance for loan losses. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows.
The determination of the appropriate level of the allowance is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. We have an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in our portfolio and portfolio segments. We have an internally developed model that requires significant judgment to determine the estimation method that fits the credit risk characteristics of the loans in our portfolio and portfolio segments. Qualitative and environmental factors that may not be directly reflected in quantitative estimates include: asset quality trends, changes in loan concentrations, new products and process changes, changes and pressures from competition, changes in lending policies and underwriting practices, trends in the nature and volume of the loan portfolio, and national and regional economic trends. Changes in these factors are considered in determining changes in the allowance for loan losses. The impact of these factors on our qualitative assessment of the allowance for loan losses can change from period to period based on management’s assessment of the extent to which these factors are already reflected in historic loss rates. The uncertainty inherent in the estimation process is also considered in evaluating the allowance for loan losses.
Acquisition Accounting. We account for our acquisitions under ASC Topic 805,Business Combinations(“ASC 805”), which requires the use of the purchase method of accounting. All identifiable assets acquired, including loans, are recorded at fair value (which is discussed below). The excess purchase price over the fair value of net assets acquired is recorded as goodwill. If the fair value of the net assets acquired exceeds the purchase price, a bargain purchase gain is recognized.
Because the fair value measurements incorporate assumptions regarding credit risk, no allowance for loan losses related to the acquired loans is recorded on the acquisition date. The fair value measurements of acquired loans are based on estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows. The fair value adjustment is amortized over the life of the loan using the effective interest method.
Through December 31, 2022, the Company accounts for acquired impaired loans under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”). An acquired loan is considered impaired when there is evidence of credit deterioration since origination and it is probable at the date of acquisition that we will be unable to collect all contractually required payments. ASC 310-30 prohibits the carryover of an allowance for loan losses for acquired impaired loans. Over the life of the acquired loans, we continually estimate the cash flows expected to be collected on individual loans or on pools of loans sharing common risk characteristics. As of the end of each fiscal quarter, we evaluate the present value of the acquired loans using the effective interest rates. For any increases in cash flows expected to be collected, we adjust the amount of accretable yield recognized on a prospective basis over the loan’s or pool’s remaining life, while we recognize a provision for loan loss in the consolidated statement of operations if the cash flows expected to be collected have decreased.
In June 2016, FASB issued a new accounting standard (ASU 2016-13), referred to as the Current Expected Credit Loss (“CECL”) standard, which became effective for us, as a smaller reporting company, on January 1, 2023. The CECL standard changes the manner in which we account for credit losses on purchased financial assets with credit deterioration. Please refer to Note 1. Summary of Significant Accounting Policies – Recent Accounting Pronouncements, in the Notes to Consolidated Financial Statements contained in Item 8. Financial Statements and Supplementary Data for additional discussion.
Overview of Financial Condition and Results of Operations
We recognized record annual net income in 2022. Net income for the year ended December 31, 2022 totaled $35.7 million, or $3.50 per diluted share, compared to $8.0 million, or $0.76 per diluted share, for the year ended December 31, 2021. This represents a $27.7 million, or a 346.4%, increase in net income. Net income increased primarily due to the decrease in provision for loan losses as a result of the $21.6 million impairment charge recorded on one of the Company’s loan relationships connected with Hurricane Ida in the third quarter of 2021. Noninterest income increased $6.3 million, which was driven by a $6.2 million increase in swap termination fee income and $1.4 million in income from insurance proceeds, partially offset by a $2.3 million decrease in gain on call or sale of investment securities. There was a $6.0 million increase in net interest income driven by a $5.8 million increase in interest on investment securities and a $3.1 million increase in interest and fees on loans partially offset by a $3.0 million increase in interest expense driven by a 17 basis point increase in our cost of funds. At December 31, 2022, the Company and the Bank each were in compliance with all regulatory capital requirements, and the Bank was considered “well-capitalized” under prompt corrective action regulations.
Additional key components of the Company’s performance during the year ended December 31, 2022 are summarized below.
| • |
Total assets grew to $2.8 billion at December 31, 2022, an increase of 9.6% from $2.5 billion at December 31, 2021. |
| • |
Total loans, net of allowance for loan losses at December 31, 2022 were $2.1 billion, an increase of $229.3 million, or 12.4% compared to $1.9 billion at December 31, 2021. |
| • |
Total deposits were $2.1 billion at December 31, 2022, a decrease of $37.9 million, or 1.8%, compared to deposits of $2.1 billion at December 31, 2021. Noninterest-bearing deposits decreased $4.7 million, or 0.8%, to $580.7 million compared to $585.5 million at December 31, 2021. |
| • |
Net interest income for the year ended December 31, 2022 was $89.8 million, an increase of $6.0 million, or 7.1%, compared to $83.8 million for the year ended December 31, 2021, driven primarily by increases in the volume and yield earned on interest-earning assets partially offset by an increase in the rates paid on interest-bearing liabilities. We experienced pressure on our net interest margin later in 2022 as interest rates rose during the year and we raised rates offered on deposits and incurred higher costs on our borrowings. |
| • |
Our total stockholders’ equity decreased to $215.8 million at December 31, 2022 compared to $242.6 million at December 31, 2021 primarily due to an increase in accumulated other comprehensive loss due to a decrease in the fair value of the Bank’s available for sale securities portfolio, partially offset by net income for fiscal year 2022. |
| • |
Credit quality metrics improved as nonperforming loans were 0.54% of total loans at December 31, 2022 compared to 1.58% at December 31, 2021. |
Certain Events That Affect Year-over-Year Comparability
Rising Inflation and Interest Rates. Inflation reached a near 40-year high in late 2021, driven in large part by economic recovery from the ongoing COVID-19 pandemic, and continued to be high during 2022 and into 2023. In response, the Federal Reserve raised interest rates seven times during 2022. During the entirety of 2021, the federal funds target rate was 0% to 0.25%, and it remained at that rate until March 2022. The Federal Reserve made the following changes to the federal funds target rate in 2022:
- On March 16, 2022, the federal funds target rate increased by 25 basis points to 0.25% to 0.50%
- On May 4, 2022, the federal funds target rate increased 50 basis points to 0.75% to 1.00%
- On June 15, 2022, the federal funds target rate increased by 75 basis points to 1.50% to 1.75%
- On July 27, 2022, the federal funds target rate increased by 75 basis points to 2.25% to 2.50%
- On September 21, 2022, the federal funds target rate increased by 75 basis points to 3.00% to 3.25%
- On November 2, 2022, the federal funds target rate increased by 75 basis points to 3.75% to 4.00%
- On December 14, 2022, the federal funds target rate increased by 50 basis points to 4.25% to 4.50%
The Federal Reserve increased the target rate again on February 1, 2023 to 4.50% to 4.75% and one or more further increases are expected during the remainder of 2023.
Hurricane Ida. On August 29, 2021, Hurricane Ida hit the Louisiana coast as a category 4 hurricane. Though Hurricane Ida did not cause significant physical damage to our branch locations, the storm devastated some of our market areas. The Company set up programs to help employees and customers experiencing financial difficulty as a result of the hurricane, including a deferral program discussed further in Discussion and Analysis of Financial Condition – Loans – Loan Deferral Program below. Additionally, the Company recorded an impairment charge of $21.6 million in the third quarter of 2021 related to a lending relationship with related borrowers (collectively, the “Borrower”) consisting of multiple loans that are secured by various types of collateral, including real estate, inventory, and equipment. As a result of Hurricane Ida’s impact on the Borrower’s business operations, some of the collateral securing the loan relationship, including real estate, inventory, and equipment, experienced a significant reduction in value.
COVID-19 Pandemic. In March 2020, COVID-19 was declared a pandemic by the World Health Organization. Our business has remained open through the pandemic, although it was significantly disrupted in the early stages of the pandemic as we adjusted to various and changing government and voluntary restrictions on activities. The pandemic generally slowed business lending activity from the level we would otherwise have expected, particularly in 2020, except for our participation in the PPP, and created excess liquidity in the market, contributing to increases in our noninterest and interest-bearing demand deposits, and in money market deposit accounts and savings accounts in 2021. We took actions to protect our customers and employees throughout the pandemic, including increasing our remote banking and working options. We recorded an increased provision for loan losses during 2020 as a result of the impact of the pandemic. Market conditions generally improved during 2021 and 2022 compared to 2020, as vaccines became available and government restrictions lessened. For additional information, see Item 1A. Risk Factors, Risks Related to our Business, “The ongoing COVID-19 pandemic, or a similar health crisis, may adversely affect our business, employees, borrowers, depositors, counterparties and third-party service providers.”
Acquisitions. On February 21, 2020, the Bank completed the acquisition and assumption of certain assets, deposits and other liabilities associated with the Alice and Victoria, Texas branch locations of PlainsCapital Bank, a wholly-owned subsidiary of Hilltop Holdings Inc., for an aggregate cash consideration of approximately $11.2 million. The Bank acquired approximately $45.3 million in loans and $37.0 million in deposits. In addition, the Bank acquired substantially all the fixed assets at the branch locations and assumed the leases for the branch facilities. The Company recorded a core deposit intangible and goodwill of $0.2 million and $0.5 million, respectively, related to the acquisition. On January 27, 2023, we completed our previously announced sale of certain assets, deposits and other liabilities associated with these branch locations in order to focus more on our core markets.
On April 1, 2021, the Company completed its acquisition of Cheaha Financial Group, Inc. (“Cheaha”) and its wholly-owned subsidiary, Cheaha Bank, an Alabama state bank headquartered in Oxford, Alabama. All of the issued and outstanding shares of Cheaha were converted into aggregate cash merger consideration of $41.1 million. On the date of the acquisition, Cheaha had total assets with a fair value of $240.8 million, including $120.4 million in loans, assumed $207.0 million in deposits, and served the residents of Calhoun County, Alabama through four branch locations. The Company recorded a core deposit intangible and goodwill of $0.8 million and $11.9 million, respectively, related to the acquisition of Cheaha.
Branches. We closed one branch location in Zachary, Louisiana in 2020. We closed one branch location in Prairieville, Louisiana in April 2021 and one branch location in Dickinson, Texas in October 2021. We closed one branch location in Baton Rouge, Louisiana and one branch location in Westlake, Louisiana in May 2022. We do not expect to open de novo branches during the remainder of 2023. We sold the land and buildings relating to these five locations during 2022. During 2022, we also sold three tracts of land that were held for future branch locations. We plan to consolidate an additional branch located in our Louisiana market in 2023. We continue to evaluate opportunities to reduce our physical branch footprint and further improve efficiency through digital initiatives. During the last three fiscal years, we have opened two de novo branch locations, both in Louisiana, in addition to the branches we acquired through our acquisition activity.
Subordinated Debt Issuance and Redemption. In April 2022, we completed a private placement of $20.0 million in aggregate principal amount of our 5.125% Fixed-to-Floating Subordinated Notes due 2032 (the “2032 Notes”). In June 2022, we used the majority of the proceeds to redeem $18.6 million of our 2017 issuance of 6.00% Fixed-to-Floating Rate Subordinated Notes due 2027 (the “2027 Notes”). We utilized the remaining proceeds for share repurchases and for general corporate purposes.
Discussion and Analysis of Financial Condition
Total assets were $2.8 billion at December 31, 2022, an increase of 9.6% compared to total assets of $2.5 billion at December 31, 2021. The growth experienced since December 31, 2021 can mainly be attributed to organic growth in loans of $232.8 million.
Loans
General. Loans, excluding loans held for sale, constitute our most significant asset, comprising 76% and 74%, of our total assets at December 31, 2022 and 2021, respectively. Loans increased $232.8 million, or 12.4%, to $2.1 billion at December 31, 2022 from $1.9 billion at December 31, 2021.
Beginning in the second quarter of 2020, the Bank has participated as a lender in the PPP as established by the CARES Act. At December 31, 2022, the balance, net of repayments, of the Bank’s PPP loans originated was $1.7 million, compared to $23.3 million at December 31, 2021, and is included in the commercial and industrial loan portfolio. Eighty-seven percent of the total number of PPP loans we have originated have principal balances of $150,000 or less. At December 31, 2022, approximately99% of the total balance of PPP loans originated have been forgiven by the SBA or paid off by the customer.
The table below sets forth the balance of loans outstanding by loan type as of the dates presented, and the percentage of each loan type to total loans (dollars in thousands).
| December 31, |
||||||||||||||||
| 2022 |
2021 |
|||||||||||||||
| Percentage of |
Percentage of |
|||||||||||||||
| Amount |
Total Loans |
Amount |
Total Loans |
|||||||||||||
| Mortgage loans on real estate |
||||||||||||||||
| Construction and development |
$ | 201,633 | 9.6 | % | $ | 203,204 | 10.9 | % | ||||||||
| 1-4 Family |
401,377 | 19.1 | 364,307 | 19.4 | ||||||||||||
| Multifamily |
81,812 | 3.9 | 59,570 | 3.2 | ||||||||||||
| Farmland |
12,877 | 0.6 | 20,128 | 1.1 | ||||||||||||
| Commercial real estate |
||||||||||||||||
| Owner-occupied |
445,148 | 21.1 | 460,205 | 24.6 | ||||||||||||
| Nonowner-occupied |
513,095 | 24.4 | 436,172 | 23.3 | ||||||||||||
| Commercial and industrial |
435,093 | 20.7 | 310,831 | 16.6 | ||||||||||||
| Consumer |
13,732 | 0.6 | 17,595 | 0.9 | ||||||||||||
| Total loans |
2,104,767 | 100 | % | 1,872,012 | 100 | % | ||||||||||
| Loans held for sale |
— | 620 | ||||||||||||||
| Total gross loans |
$ | 2,104,767 | $ | 1,872,632 | ||||||||||||
At December 31, 2022, the Company’s total business lending portfolio, which consists of loans secured by owner-occupied commercial real estate properties and commercial and industrial loans, was $880.2 million, an increase of $109.2 million, or 14.2%, compared to the business lending portfolio of $771.0 million at December 31, 2021. The increase in the business lending portfolio as of December 31, 2022 is primarily driven by increased loan production, particularly in public finance loans, by our Commercial and Industrial Division, partially offset by the forgiveness of PPP loans and a decrease in owner-occupied commercial real estate loans.
Nonowner-occupied loans totaled $513.1 million at December 31, 2022, an increase of $76.9 million, or 17.6% compared to $436.2 million at December 31, 2021, primarily due to organic growth.
Our focus on a relationship-driven banking strategy and hiring of experienced commercial lenders are the primary reasons we experienced our largest organic loan growth in the commercial and industrial loan portfolio. We have increased our emphasis on originating commercial and industrial and commercial real estate loans.
Loan Concentrations. Loan concentrations are considered to exist when there are amounts loaned to multiple borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At December 31, 2022 and December 31, 2021, we had no concentrations of loans exceeding 10% of total loans other than loans in the categories listed in the table above.
The following table sets forth loans outstanding at December 31, 2022, excluding loans held for sale, which, based on remaining scheduled repayments of principal, are due in the periods indicated, as well as the amount of loans with fixed and variable rates in each maturity range. Loans with balloon payments and longer amortizations are often repriced and extended beyond the initial maturity when credit conditions remain satisfactory. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported below as due in one year or less.
| After One |
After Five |
After Ten |
||||||||||||||||||||||
| One Year or |
Year Through |
Years Through |
Years Through |
After Fifteen |
||||||||||||||||||||
| (dollars in thousands) |
Less |
Five Years |
Ten Years |
Fifteen Years |
Years |
Total |
||||||||||||||||||
| Mortgage loans on real estate: |
||||||||||||||||||||||||
| Construction and development |
$ | 97,765 | $ | 50,271 | $ | 29,689 | $ | 10,229 | $ | 13,679 | $ | 201,633 | ||||||||||||
| 1-4 Family |
50,523 | 73,898 | 58,875 | 26,143 | 191,938 | 401,377 | ||||||||||||||||||
| Multifamily |
6,603 | 61,411 | 12,237 | 443 | 1,118 | 81,812 | ||||||||||||||||||
| Farmland |
5,826 | 4,839 | 2,212 | — | — | 12,877 | ||||||||||||||||||
| Commercial real estate |
||||||||||||||||||||||||
| Owner-occupied |
27,834 | 90,097 | 204,710 | 113,557 | 8,950 | 445,148 | ||||||||||||||||||
| Nonowner-occupied |
31,938 | 269,193 | 174,003 | 37,743 | 218 | 513,095 | ||||||||||||||||||
| Commercial and industrial |
169,481 | 91,399 | 103,855 | 62,287 | 8,071 | 435,093 | ||||||||||||||||||
| Consumer |
3,058 | 8,864 | 1,294 | 348 | 168 | 13,732 | ||||||||||||||||||
| Total loans |
$ | 393,028 | $ | 649,972 | $ | 586,875 | $ | 250,750 | $ | 224,142 | $ | 2,104,767 | ||||||||||||
| Loans with fixed rates: |
||||||||||||||||||||||||
| Mortgage loans on real estate: |
||||||||||||||||||||||||
| Construction and development |
$ | 12,195 | $ | 49,723 | $ | 29,689 | $ | 10,229 | $ | 13,679 | $ | 115,515 | ||||||||||||
| 1-4 Family |
14,451 | 66,799 | 58,875 | 26,143 | 191,938 | 358,206 | ||||||||||||||||||
| Multifamily |
6,303 | 58,263 | 5,552 | 443 | 1,118 | 71,679 | ||||||||||||||||||
| Farmland |
2,860 | 3,638 | 2,212 | — | — | 8,710 | ||||||||||||||||||
| Commercial real estate |
||||||||||||||||||||||||
| Owner-occupied |
19,772 | 75,244 | 162,832 | 92,636 | 2,237 | 352,721 | ||||||||||||||||||
| Nonowner-occupied |
24,373 | 249,642 | 141,039 | 18,813 | 218 | 434,085 | ||||||||||||||||||
| Commercial and industrial |
40,315 | 62,914 | 103,855 | 62,287 | 8,071 | 277,442 | ||||||||||||||||||
| Consumer |
2,323 | 8,864 | 1,294 | 348 | 168 | 12,997 | ||||||||||||||||||
| Total loans with fixed rates |
$ | 122,592 | $ | 575,087 | $ | 505,348 | $ | 210,899 | $ | 217,429 | $ | 1,631,355 | ||||||||||||
| Loans with variable rates: |
||||||||||||||||||||||||
| Mortgage loans on real estate: |
||||||||||||||||||||||||
| Construction and development |
$ | 85,570 | $ | 548 | $ | — | $ | — | $ | — | $ | 86,118 | ||||||||||||
| 1-4 Family |
36,072 | 7,099 | — | — | — | 43,171 | ||||||||||||||||||
| Multifamily |
300 | 3,148 | 6,685 | — | — | 10,133 | ||||||||||||||||||
| Farmland |
2,966 | 1,201 | — | — | — | 4,167 | ||||||||||||||||||
| Commercial real estate |
||||||||||||||||||||||||
| Owner-occupied |
8,062 | 14,853 | 41,878 | 20,921 | 6,713 | 92,427 | ||||||||||||||||||
| Nonowner-occupied |
7,565 | 19,551 | 32,964 | 18,930 | — | 79,010 | ||||||||||||||||||
| Commercial and industrial |
129,166 | 28,485 | — | — | — | 157,651 | ||||||||||||||||||
| Consumer |
735 | — | — | — | — | 735 | ||||||||||||||||||
| Total loans with variable rates |
$ | 270,436 | $ | 74,885 | $ | 81,527 | $ | 39,851 | $ | 6,713 | $ | 473,412 | ||||||||||||
Loan Deferral Program. In response to the COVID-19 pandemic, beginning in the first quarter of 2020, the Bank offered short-term modifications to borrowers impacted by the pandemic who were current and otherwise not past due. These included short-term modifications of 90 days or less, in the form of deferrals of payment of principal and interest, principal only, or interest only, and fee waivers. As 90-day loan deferrals have expired, most affected customers have returned to their regular payment schedules. In accordance with applicable law and regulatory guidance adopted in response to the pandemic, we have not accounted for such loans as troubled debt restructurings (“TDRs”), nor have we designated them as past due or nonaccrual. The Bank ceased offering loan deferrals related to COVID-19 during the fourth quarter of 2021. At December 31, 2022, no loans remained on deferral, compared to less than $0.2 million at December 31, 2021.
The Bank also instituted a 90-day deferral program for eligible customers who were impacted by Hurricane Ida beginning in the third quarter of 2021. The Bank has provided payment deferrals on approximately $50.0 million of loans. At December 31, 2022, no loans remained on deferral, compared to approximately $2.4 million, or 0.1% of the total loan portfolio, remaining on a 90-day deferral plan related to Hurricane Ida at December 31, 2021.
Investment Securities
We purchase investment securities primarily to provide a source for meeting liquidity needs, with return on investment as a secondary consideration. We also use investment securities as collateral for certain deposits and other types of borrowings. Investment securities represented 15% of our total assets and totaled $413.5 million at December 31, 2022, an increase of $47.7 million, or 13.0%, from $365.8 million at December 31, 2021. The increase in investment securities at December 31, 2022 compared to December 31, 2021 resulted from purchases of multiple investment types in our current portfolio, primarily mortgage-backed securities.
The table below shows the carrying value of our investment securities portfolio by investment type and the percentage that such investment type comprises of our entire portfolio as of the dates indicated (dollars in thousands).
| December 31, |
||||||||||||||||
| 2022 |
2021 |
|||||||||||||||
| Percentage of |
Percentage of |
|||||||||||||||
| Balance |
Portfolio |
Balance |
Portfolio |
|||||||||||||
| Obligations of the U.S Treasury and U.S. government agencies and corporations |
$ | 29,805 | 7.2 | % | $ | 21,268 | 5.8 | % | ||||||||
| Obligations of state and political subdivisions |
23,916 | 5.8 | 39,495 | 10.8 | ||||||||||||
| Corporate bonds |
29,942 | 7.2 | 27,667 | 7.6 | ||||||||||||
| Residential mortgage-backed securities |
254,618 | 61.6 | 203,249 | 55.6 | ||||||||||||
| Commercial mortgage-backed securities |
75,191 | 18.2 | 74,085 | 20.2 | ||||||||||||
| Total investment securities |
$ | 413,472 | 100 | % | $ | 365,764 | 100 | % | ||||||||
The investment portfolio consists of available for sale and held to maturity securities. We do not hold any investments classified as trading. We classify debt securities as held to maturity if management has the positive intent and ability to hold the securities to maturity. Held to maturity securities are stated at amortized cost. Securities not classified as held to maturity are classified as available for sale and are stated at fair value. The carrying values of the Company’s available for sale securities are adjusted for unrealized gains or losses as valuation allowances, and any gains or losses are reported on an after-tax basis as a component of other comprehensive loss. Any expected credit loss due to the inability to collect all amounts due according to the security’s contractual terms is recognized as a charge against earnings. Any remaining unrealized loss related to other factors would be recognized in other comprehensive loss, net of taxes. Please refer to Note 1. Summary of Significant Accounting Policies – Recent Accounting Pronouncements, in the Notes to Consolidated Financial Statements contained in Item 8. Financial Statements and Supplementary Data for information regarding our adoption, effective January 1, 2023, of ASU 2016-13, which will impact how we account for our securities portfolio.
Typically, our investment securities are available for sale. There were no purchases of held to maturity securities during the years ended December 31, 2022 and 2021. In the year ended December 31, 2022, we purchased $181.6 million of investment securities, compared to purchases of $255.5 million during the year ended December 31, 2021. Mortgage-backed securities represented 84% and 73% of the available for sale securities we purchased in 2022 and 2021, respectively. Of the remaining securities purchased in 2022 and 2021, 9%, and 18%, respectively, were U.S. Treasury and U.S. government agencies and corporations securities, 5% and 4%, respectively were corporate bonds, and 2% and 5%, respectively, were municipal securities. We only purchase corporate bonds that are investment grade securities issued by seasoned corporations. Due in large part to higher interest rates and market volatility during 2022, at December 31, 2022, unrealized losses in our investment portfolio totaled $62.5 million.
The table below sets forth the stated maturities and weighted average yields of our investment debt securities based on the amortized cost of our investment portfolio as of December 31, 2022 (dollars in thousands).
| After One Year |
After Five Years |
|||||||||||||||||||||||||||||||
| One Year or Less |
Through Five Years |
Through Ten Years |
After Ten Years |
|||||||||||||||||||||||||||||
| Amount |
Yield |
Amount |
Yield |
Amount |
Yield |
Amount |
Yield |
|||||||||||||||||||||||||
| Held to maturity: |
||||||||||||||||||||||||||||||||
| Obligations of states and political subdivisions |
$ | 915 | 5.88 | % | $ | 960 | 5.88 | % | $ | 3,663 | 3.59 | % | $ | — | — | % | ||||||||||||||||
| Residential mortgage-backed securities |
— | — | — | — | — | — | 2,767 | 3.06 | ||||||||||||||||||||||||
| Available for sale: |
||||||||||||||||||||||||||||||||
| Obligations of the U.S Treasury and U.S. government agencies and corporations |
490 | 2.92 | 14,999 | 3.53 | 14,881 | 4.84 | — | — | ||||||||||||||||||||||||
| Obligations of states and political subdivisions |
342 | 3.14 | 1,573 | 2.56 | 10,257 | 2.41 | 8,926 | 2.77 | ||||||||||||||||||||||||
| Corporate bonds |
250 | 5.37 | 12,176 | 3.65 | 17,051 | 4.25 | 4,000 | 2.69 | ||||||||||||||||||||||||
| Residential mortgage-backed securities |
— | — | — | — | 6,349 | 2.78 | 292,518 | 2.26 | ||||||||||||||||||||||||
| Commercial mortgage-backed securities |
— | — | 3,704 | 2.72 | 3,555 | 2.82 | 76,245 | 3.07 | ||||||||||||||||||||||||
| $ | 1,997 | $ | 33,412 | $ | 55,756 | $ | 384,456 | |||||||||||||||||||||||||
The maturity of mortgage-backed securities reflects scheduled repayments based upon the contractual maturities of the securities. Weighted average yields on tax-exempt obligations have been computed on a fully tax equivalent basis assuming a federal tax rate of 21%.
Premises and Equipment
Bank premises and equipment decreased $8.5 million, or 14.6%, to $49.6 million at December 31, 2022 from $58.1 million at December 31, 2021. The decrease was attributable to the closure of two branches in Louisiana and the sale of three tracts of land that were being held as future branch locations, which decreased bank premises and equipment by $3.2 million and $3.5 million, respectively. Bank premises and equipment increased $1.8 million, or 3.2%, to $58.1 million at December 31, 2021 from $56.3 million at December 31, 2020. The increase was attributable to the acquisition of four branch locations in Calhoun County, Alabama as a result of our acquisition of Cheaha which increased bank premises and equipment by $5.4 million, and was partially offset by the closure of two branches, one in Louisiana and one in Texas, which decreased bank premises and equipment by $2.3 million.
Deferred Tax Asset/Liability
At December 31, 2022, the net deferred tax asset was $16.4 million, compared to net deferred tax assets of $2.2 million and $1.4 million at December 31, 2021 and 2020, respectively. The increase in the deferred tax asset at December 31, 2022 compared to December 31, 2021 was primarily driven by a decrease in the fair value of the Bank’s available for sale securities portfolio. The increase in the deferred tax asset at December 31, 2021 compared to December 31, 2020 was primarily driven by the deferred compensation agreements acquired from Cheaha in April 2021 and a timing difference in recognizing payroll tax expenses.
The Bank acquired net operating loss carryforwards as a result of acquisitions. At December 31, 2022, we held approximately $0.1 million and $0.8 million in net operating loss carryforwards that expire in 2033 and 2039, respectively. U.S. tax law imposes annual limitations under Internal Revenue Code Section 382 on the amount of net operating loss carryforwards that may be used to offset federal taxable income. Under these laws, we may apply up to approximately $0.6 million to offset our taxable income each year. In addition to this limitation, our ability to utilize net operating loss carryforwards depends upon the Company generating taxable income. Given the substantial amount of time before our net operating loss carryforwards begin to expire, we currently expect to utilize these net operating loss carryforwards in full before their expiration.
Deposits
The following table sets forth the composition of our deposits and the percentage of each deposit type to total deposits at December 31, 2022 and 2021 (dollars in thousands).
| December 31, |
||||||||||||||||
| 2022 |
2021 |
|||||||||||||||
| Percentage of |
Percentage of |
|||||||||||||||
| Total |
Total |
|||||||||||||||
| Amount |
Deposits |
Amount |
Deposits |
|||||||||||||
| Noninterest-bearing demand deposits |
$ | 580,741 | 27.9 | % | $ | 585,465 | 27.6 | % | ||||||||
| Interest-bearing demand deposits |
565,598 | 27.1 | 650,868 | 30.7 | ||||||||||||
| Money market deposit accounts |
208,596 | 10.0 | 255,501 | 12.1 | ||||||||||||
| Savings accounts |
155,176 | 7.5 | 180,837 | 8.5 | ||||||||||||
| Time deposits |
572,254 | 27.5 | 447,595 | 21.1 | ||||||||||||
| Total deposits |
$ | 2,082,365 | 100 | % | $ | 2,120,266 | 100 | % | ||||||||
Total deposits were $2.08 billion at December 31, 2022, a decrease of $37.9 million, or 1.8%, from total deposits of $2.12 billion at December 31, 2021. The increase in time deposits compared to December 31, 2021 is due to increased rates offered to remain competitive in our markets, as we adjusted our strategy in response to the rising interest rate environment after running off higher yielding time deposits through the end of the second quarter of 2022. The decreases in the remaining categories compared to December 31, 2021 are primarily driven by customers drawing down on their existing deposit accounts. During 2021, we experienced large increases in both noninterest and interest-bearing demand deposits, and in money market deposit accounts and savings accounts, primarily driven by reduced spending by consumer and business customers related to the COVID-19 pandemic, and increases in PPP borrowers’ deposit accounts.
The Company had no brokered demand deposits at December 31, 2022 and 2021. Prior to December 31, 2021, the Bank utilized brokered demand deposits to satisfy the borrowings under its interest rate swap agreements due to more favorable pricing. In the third quarter of 2021, we voluntarily terminated multiple swap agreements, the borrowings for which matured in October 2021. During 2022, we voluntarily terminated our remaining interest rate swap agreements.
Estimated uninsured deposits were $701.1 million and $719.8 million at December 31, 2022 and 2021, respectively. The estimates are based on the same methodologies and assumptions used for our regulatory reporting requirements. The insured deposit data for 2022 and 2021 does not reflect an evaluation of all of the account ownership category distinctions that would determine the availability of deposit insurance to individual accounts based on FDIC regulations.
The following table shows scheduled maturities of time deposits in excess of the FDIC insurance limit of $250,000 at December 31, 2022 and 2021 (dollars in thousands).
| December 31, |
||||||||
| Time remaining until maturity: |
2022 |
2021 |
||||||
| Three months or less |
$ | 63,006 | $ | 21,644 | ||||
| Over three months through six months |
13,610 | 16,490 | ||||||
| Over six months through twelve months |
58,672 | 25,024 | ||||||
| Over twelve months |
14,228 | 14,211 | ||||||
| Total |
$ | 149,516 | $ | 77,369 | ||||
Borrowings
Total borrowings include securities sold under agreements to repurchase, federal funds purchased, advances from the Federal Home Loan Bank (“FHLB”), unsecured lines of credit with First National Bankers Bank (“FNBB”) and The Independent Bankers Bank (“TIB”) totaling $60.0 million, subordinated debt issued in 2019 and 2022, and junior subordinated debentures assumed through acquisitions.
Our advances from the FHLB were $387.0 million at December 31, 2022, an increase of $308.5 million from FHLB advances of $78.5 million at December 31, 2021. FHLB advances are used to fund increased loan and investment activity that is not funded by deposits or other borrowings. We had no outstanding balances drawn on the unsecured lines of credit at December 31, 2022 or 2021. We had no securities sold under agreements to repurchase at December 31, 2022 compared to $5.8 million at December 31, 2021. Junior subordinated debt of $8.5 million and $8.4 million at December 31, 2022 and 2021, respectively, represents the junior subordinated debentures that we assumed in connection with our acquisitions of Cheaha in 2021, BOJ Bancshares, Inc. in 2017 (“BOJ”), and First Community Bank in 2013.
The average balances and cost of short-term borrowings for the years ended December 31, 2022, 2021 and 2020 are summarized in the table below (dollars in thousands).
| Average Balances |
Cost of Short-term Borrowings |
|||||||||||||||||||||||
| December 31, |
December 31, |
|||||||||||||||||||||||
| 2022 |
2021 |
2020 |
2022 |
2021 |
2020 |
|||||||||||||||||||
| Federal funds purchased and other short-term borrowings |
$ | 132,703 | $ | 3,242 | $ | 60,243 | 3.08 | % | 0.20 | % | 1.15 | % | ||||||||||||
| Securities sold under agreements to repurchase |
1,489 | 6,081 | 5,080 | 0.15 | 0.21 | 0.30 | ||||||||||||||||||
| Total short-term borrowings |
$ | 134,192 | $ | 9,323 | $ | 65,323 | 3.05 | % | 0.20 | % | 1.09 | % | ||||||||||||
2032 Notes. On April 6, 2022, we entered into a Subordinated Note Purchase Agreement with certain institutional accredited investors and qualified institutional buyers (the “Purchasers”) under which we issued $20.0 million in aggregate principal amount of our 2032 Notes to the Purchasers at a price equal to 100% of the aggregate principal amount of the 2032 Notes. The 2032 Notes were issued under an indenture, dated April 6, 2022 (the “Indenture”), by and among the Company and UMB Bank, National Association, as trustee.
The 2032 Notes have a stated maturity date of April 15, 2032 and will bear interest at a fixed rate of 5.125% per year from and including April 6, 2022 to but excluding April 15, 2027 or earlier redemption date. From April 15, 2027 to but excluding the stated maturity date or earlier redemption date, the 2032 Notes will bear interest a floating rate equal to the then current three-month term secured overnight financing rate (“SOFR”), plus 277 basis points. As provided in the 2032 Notes, the interest rate on the 2032 Notes during the applicable floating rate period may be determined based on a rate other than three-month term SOFR. The 2032 Notes may be redeemed, in whole or in part, on or after April 15, 2027 or, in whole but not in part, under certain other limited circumstances set forth in the Indenture. Any redemption we made would be at a redemption price equal to 100% of the principal balance being redeemed, together with any accrued and unpaid interest to the date of redemption.
Principal and interest on the 2032 Notes are subject to acceleration only in limited circumstances in the case of certain bankruptcy and insolvency-related events. The 2032 Notes are the unsecured, subordinated obligations of the Company and rank junior in right of payment to our current and future senior indebtedness and to our obligations to our general creditors. The 2032 Notes are intended to qualify as Tier 2 capital for regulatory purposes.
We used the majority of the net proceeds to redeem our 2027 Notes in June 2022, and utilized the remaining proceeds for share repurchases and for general corporate purposes.
2029 Notes. On November 12, 2019, the Company issued $25.0 million in aggregate principal amount of its 5.125% Fixed-to-Floating Rate Subordinated 2029 Notes due 2029 (“2029 Notes”) at 100% of their face amount in a private placement to certain institutional and other accredited investors. The 2029 Notes have a maturity date of December 30, 2029. From and including the date of issuance to, but excluding December 30, 2024, the 2029 Notes will bear interest at an initial fixed rate of 5.125% per annum, payable semi-annually in arrears. From and including December 30, 2024 and thereafter, the 2029 Notes will bear interest at a floating rate equal to the then-current three-month LIBOR as calculated on each applicable date of determination, or an alternative rate determined in accordance with the terms of the 2029 Notes if the three-month LIBOR cannot be determined, plus 3.490%, payable quarterly in arrears.
The Company may redeem the 2029 Notes, in whole or in part, on or after December 30, 2024 or, in whole but not in part, under certain limited circumstances set forth in the 2029 Notes. Any redemption by the Company would be at a redemption price equal to 100% of the principal balance being redeemed, together with any accrued and unpaid interest to the date of redemption.
Principal and interest on the 2029 Notes are not subject to acceleration, except upon certain bankruptcy-related events. The 2029 Notes are unsecured, subordinated obligations of the Company and rank junior in right of payment to the Company’s current and future senior indebtedness and to the Company’s obligations to its general creditors. The 2029 Notes are obligations of the Company only and are not obligations of, and are not guaranteed by, any of the Company’s subsidiaries. The 2029 Notes are structured to qualify as Tier 2 capital for regulatory capital purposes.
2027 Notes. On March 24, 2017, the Company issued $18.6 million in aggregate principal amount of its 2027 Notes due March 20, 2027 at 100% of the aggregate principal amount of the 2027 Notes.
From and including the date of issuance, but excluding March 30, 2022, the 2027 Notes bore interest at an initial fixed rate of 6.00% per annum, payable semi-annually. From and including March 30, 2022 and thereafter, the 2027 Notes bore interest at a floating rate equal to the then-current three-month LIBOR (but not less than zero) as calculated on each applicable date of determination, plus 3.945%, payable quarterly.
The Company could, beginning with the interest payment date of March 30, 2022, and on any interest payment date thereafter, redeem the 2027 Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the 2027 Notes to be redeemed plus accrued and unpaid interest to but excluding the date of redemption. The 2027 Notes were structured to qualify as Tier 2 capital for regulatory capital purposes.
In June 2022, we redeemed the 2027 Notes in full in accordance with their terms at a redemption price equal to 100% of the outstanding principal balance plus accrued and unpaid interest up to but excluding the June 30, 2022 redemption date (“Redemption Date”) . The aggregate redemption price, excluding accrued interest, totaled $18.6 million. Interest on the 2027 Notes no longer accrued on or after the Redemption Date.
Stockholders’ Equity
Stockholders’ equity was $215.8 million at December 31, 2022, a decrease of $26.8 million, or 11.1%, compared to December 31, 2021. The decrease in stockholders’ equity is primarily attributable to an increase in accumulated other comprehensive loss due to a decrease in the fair value of the Bank’s AFS securities portfolio, partially offset by net income for fiscal year 2022.
Results of Operations
Performance Summary
2022 vs. 2021. For the year ended December 31, 2022, net income was $35.7 million, or $3.54 per basic common share and $3.50 per diluted common share, compared to net income of $8.0 million, or $0.77 per basic common share and $0.76 per diluted common share, for the year ended December 31, 2021. The primary driver of the increase in net income is related to a decrease in provision for loan losses due to the $21.6 million impairment charge recorded during the third quarter of 2021 as a result of Hurricane Ida. As shown on the consolidated statement of income for the year ended December 31, 2022, a provision for loan losses of $2.9 million was recorded, compared to a provision for loan losses of $22.9 million for the year ended December 31, 2021. We had record annual net income in 2022 primarily as a result of increases in interest income and noninterest income as well as a decrease in noninterest expense compared to 2021. Return on average assets increased to 1.37% for the year ended December 31, 2022 from 0.31% for the year ended December 31, 2021. Return on average equity was 15.63% for the year ended December 31, 2022 compared to 3.22% for the year ended December 31, 2021. The increase in both return on average assets and return on average equity is mainly attributable to the $27.7 million increase in net income.
2021 vs. 2020. For the year ended December 31, 2021, net income was $8.0 million, or $0.77 per basic common share and $0.76 per diluted common share, compared to net income of $13.9 million, or $1.27 per basic and diluted common share, for the year ended December 31, 2020. The primary drivers of the decrease in net income are related to an increase in provision for loan losses due to the $21.6 million impairment charge recorded during the third quarter of 2021 as a result of Hurricane Ida, along with increases in salaries and benefits expense, other operating expenses, and acquisition expenses primarily related to our organic growth and acquisition activity. As shown on the consolidated statement of income for the year ended December 31, 2021, a provision for loan losses of $22.9 million was recorded, compared to a provision for loan losses of $11.2 million for the year ended December 31, 2020. We had record quarterly net income in each quarter of 2021 other than the third quarter, as market conditions improved and our cost of funds decreased compared to 2020. Return on average assets decreased to 0.31% for the year ended December 31, 2021 from 0.61% for the year ended December 31, 2020. Return on average equity was 3.22% for the year ended December 31, 2021 compared to 5.77% for the year ended December 31, 2020. The decrease in both return on average assets and return on average equity is mainly attributable to the $5.9 million decrease in net income.
Net Interest Income and Net Interest Margin
Net interest income, our principal source of earnings, is the difference between the interest income generated by earning assets and the total interest cost of the deposits and borrowings obtained to fund those assets. Factors affecting the level of net interest income include the volume of earning assets and interest-bearing liabilities, yields earned on loans and investments and rates paid on deposits and other borrowings, the level of nonperforming loans, the amount of noninterest-bearing liabilities supporting earning assets, and the interest rate environment.
The primary factors affecting net interest margin are changes in interest rates, competition, and the shape of the interest rate yield curve. The Federal Reserve Board sets various benchmark rates, including the federal funds rate, and thereby influences the general market rates of interest, including the deposit and loan rates offered by financial institutions. On March 3, 2020, the Federal Reserve lowered the federal funds target rate to 1.00% to 1.25%, which the Federal Reserve stated was in response to the evolving risks to economic activity posed by the coronavirus. In a measure aimed at lessening the economic impact of COVID-19, the Federal Reserve reduced the federal funds target rate to 0% to 0.25% on March 16, 2020, where it remained until March 2022 when the Federal Reserve began increasing the federal funds target rate a total of seven times during 2022 to 4.25% to 4.50% as discussed in Certain Events That Affect Year-over-Year Comparability – Rising Inflation and Interest Rates.
2022 vs. 2021. Net interest income increased 7.1% to $89.8 million for the year ended December 31, 2022 from $83.8 million for the same period in 2021. Net interest margin was 3.67% for the year ended December 31, 2022, an increase of 14 basis points from 3.53% for the year ended December 31, 2021. The increase in net interest income resulted primarily from increases in both the volume of interest-earning assets and the yield earned on those assets, primarily in our investment securities portfolio and to a lesser extent our loan portfolio, and a decrease in the volume of interest-bearing liabilities, partially offset by an increase in the rates paid on interest-bearing liabilities. For the year ended December 31, 2022, average loans and average investment securities increased approximately $35.2 million and $165.3 million, respectively, while average interest-bearing deposits decreased approximately $110.1 million. The increase in average loans is primarily driven by organic growth, and the increase in average investment securities is driven by purchases of investment securities. The decrease in the average balance of interest-bearing deposits was driven by a decrease in the average balance of brokered demand deposits due to the timing of terminations of our interest rate swap agreements and a decrease in the average balance of time deposits due to management's strategy to run off higher yielding time deposits through the end of the second quarter of 2022. Average short-term borrowings increased approximately $124.9 million compared to the same period in 2021 as we utilized advances from the FHLB to fund loan growth and investment activity. Our yield on interest-earning assets increased as did our rate paid on interest-bearing liabilities primarily as a result of the overall increase in prevailing interest rates.
Although our net interest margin increased from 2021 to 2022, we experienced margin pressure later in 2022. During 2022, as we raised rates offered on deposits and incurred higher costs on our borrowings, comparing the three months ended December 30, 2021 and the three months ended December 31, 2022, respectively, our yield on interest-earning assets increased from 3.95% to 4.57% while the cost of our total interest-bearing liabilities increased from 0.52% to 1.45%, producing a seven basis point decrease in our net interest margin from 3.57% to 3.50%. We may experience additional pressure on our net interest margin during 2023 if our cost of funds increases faster than the yield on our interest-earning assets.
Interest income was $104.6 million for the year ended December 31, 2022 compared to $95.5 million for the same period in 2021. Loan interest income made up substantially all of our interest income for the years ended December 31, 2022 and 2021, although interest on investment securities contributed 9.8% of interest income for the year ended December 31, 2022 compared to 4.7% for the same period in 2021. Interest on our commercial real estate loans, commercial and industrial loans, and 1-4 family residential real estate loans constituted the three largest components of our loan interest income for the years ended December 31, 2022 and 2021 at 84% and 83% of total interest income on loans, respectively. The overall yield on interest-earning assets increased 26 basis points to 4.28% for the year ended December 31, 2022 compared to 4.02% for the same period in 2021. The loan portfolio yielded 4.82% for the year ended December 31, 2022 compared to 4.74% for the year ended December 31, 2021. The increase in yield on our loan portfolio was driven primarily by higher yields on commercial real estate loans and 1-4 family residential real estate loans. In addition, the yield on the investment portfolio was 2.23% for the year ended December 31, 2022 compared to 1.52% for the year ended December 31, 2021.
Interest expense was $14.8 million for the year ended December 31, 2022, an increase of $3.1 million compared to interest expense of $11.7 million for the year ended December 31, 2021. The increase in interest expense is primarily attributable to the increase in the rates paid for interest-bearing liabilities, primarily short-term borrowings, partially offset by the decrease in the volume of interest-bearing liabilities for the year ended December 31, 2022 compared to December 31, 2021. For the year ended December 31, 2022, the cost of short-term borrowings increased 285 basis points to 3.05% due to an increase in the federal funds target rate. As previously discussed, the federal funds target rate increased from 0% to 0.25% to 4.25% to 4.50% during 2022, which affects the rate the Company pays for immediately available overnight funds, long-term borrowings, and deposits. For the year ended December 31, 2022, the cost of interest-bearing deposits decreased four basis points to 0.42% and the cost of interest-bearing liabilities increased 17 basis points to 0.84% compared to the same period in 2021.
2021 vs. 2020. For a detailed discussion of our net interest income and net interest margin performance for 2021 compared to 2020, see our annual report on Form 10-K for the year ended December 31, 2021, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Net Interest Income and Net Interest Margin –2021 vs. 2020, and – Volume/Rate Analysis.
Average Balances and Yields. The following table sets forth average balance sheet data, including all major categories of interest-earning assets and interest-bearing liabilities, together with the interest earned or paid and the average yield or rate paid on each such category as of and for the years ended December 31, 2022, 2021 and 2020. Averages presented below are daily averages (dollars in thousands).
| As of and for the years ended December 31, |
||||||||||||||||||||||||||||||||||||
| 2022 |
2021 |
2020 |
||||||||||||||||||||||||||||||||||
| Interest |
Interest |
Interest |
||||||||||||||||||||||||||||||||||
| Average | Income/ | Yield/ | Average | Income/ | Yield/ | Average | Income/ | Yield/ | ||||||||||||||||||||||||||||
| Balance |
Expense(1) |
Rate(1) |
Balance |
Expense(1) |
Rate(1) |
Balance |
Expense(1) |
Rate(1) |
||||||||||||||||||||||||||||
| Assets |
||||||||||||||||||||||||||||||||||||
| Interest-earning assets: |
||||||||||||||||||||||||||||||||||||
| Loans |
$ | 1,937,255 | $ | 93,373 | 4.82 | % | $ | 1,902,070 | $ | 90,230 | 4.74 | % | $ | 1,786,302 | $ | 87,365 | 4.89 | % | ||||||||||||||||||
| Securities: |
||||||||||||||||||||||||||||||||||||
| Taxable |
442,767 | 9,796 | 2.21 | 275,963 | 3,948 | 1.43 | 255,405 | 4,927 | 1.93 | |||||||||||||||||||||||||||
| Tax-exempt |
18,746 | 482 | 2.57 | 20,259 | 552 | 2.73 | 25,024 | 686 | 2.74 | |||||||||||||||||||||||||||
| Interest-earning balances with banks |
45,542 | 918 | 2.02 | 176,349 | 812 | 0.46 | 42,852 | 816 | 1.90 | |||||||||||||||||||||||||||
| Total interest-earning assets |
2,444,310 | 104,569 | 4.28 | 2,374,641 | 95,542 | 4.02 | 2,109,583 | 93,794 | 4.45 | |||||||||||||||||||||||||||
| Cash and due from banks |
34,327 | |||||||||||||||||||||||||||||||||||